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RBI's 6th bi-monthly monetary policy is a pleasant surprise

As you are aware, RBI had announced a cut in the policy interest rates just a few weeks ago.

As such, no further reduction was expected yesterday when the RBI Governor Dr. Raghuram Rajan issued the sixth and final bi-monthly monetary policy statement for the Financial Year 2014-15.

Nevertheless, it does contain some really interesting recommendations.

Before that, however, it must be mentioned that banks continue to remain customer-unfriendly. Barring a few, no bank has reduced the lending rates for its existing borrowers even after RBI announced the cut in its policy rates. 

Past experience shows that banks are extremely prompt in passing on the burden of higher rates to its customers. But they are highly reluctant to implement rate cuts. I guess we have to go back to the days of administered interest rates. If banks continue to exploit their customers, they don't deserve the freedom extended to them.

Coming to the notable developments in RBI's statement...

More liquidity to the banks
The percentage of deposits raised by banks, that has to be compulsorily kept in the Government securities (called the Statutory Liquidity Ratio), has been slashed by 0.5% (from 22% to 21.5%). This would result in around Rs.45,000 crores as surplus money for the banks to lend. Hopefully, this will motivate them to reduce the interest rates on home loans, vehicle loans, personal loans and other forms of credit so as to spur demand.

Doubling the limit under Liberalized Remittance Scheme
One of the most pleasant surprises has been the increase in the limit under the Liberalized Remittance Scheme (LRS). Under LRS, you are permitted to freely transfer money abroad, up to a specified limit, for any permitted current or capital account transaction or a combination of both, including buying immovable property outside India.

Due to difficult economic conditions, in Aug 2013 RBI had substantially curtailed this freedom. The limit on remittance under LRS was reduced from from US$ 200,000 to only US$ 75,000 per person per year; besides prohibiting purchase of property abroad. A year later, in July 2014, the ban on buying property was lifted and the limit enhanced to US$ 125,000.

And now comes the announcement that the permissible remittance abroad has been doubled to US$ 250,000 per person per year. This is without any end-use restrictions except for prohibited foreign exchange transactions such as margin trading, lotteries etc.

New type of Fixed Deposits
Presently, all bank fixed deposits up to Rs.1 crore from the individuals and HUFs have the facility of early encashment i.e. they are callable deposits.

RBI plans to shortly announce guidelines for the issue of non-callable fixed deposits i.e. those that will not allow premature withdrawal. Banks are likely to be permitted to offer higher interest rates on such deposits to make them more attractive than the callable ones. As such, those risk-averse and FD-loving investors who don't mind the lock-in, would be able to earn something extra on their bank deposits (even though blind faith in fixed deposits may be destroying wealth).

Concluding, have fun... there are fresh additions to the bouquet of varied investment products available to you.

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