Moneycontrol
Dec 06, 2017 04:08 PM IST | Source: Moneycontrol.com

Recapitalisation of public sector banks likely to improve credit flow: RBI

The Reserve Bank of India (RBI) Monetary Policy Committee kept the repo rate unchanged at 6 percent in the fifth bi-monthly meet and pointed that recapitalisation of public sector banks will help in improving credit flow.

The Monetary Policy Committee (MPC) on Wednesday kept the repo rate unchanged at 6 percent in the fifth bi-monthly meet. The Reserve Bank of India maintained the status quo with a neutral stance and warning on fiscal slippages.

On the public banks recapitalisation plan, the MPC said that it help in improving credit flow. The overall business situation, which is expected to improve in the fourth quarter, is likely to be supported by the recapitalisation plan.

"Recapitalisation of public sector banks may help improve credit flows further," RBI's policy document said.

Read more - RBI Monetary Policy LIVE: Central bank to cap merchant discount rate

In October this year, Finance Minister Arun Jaitley had announced a PSU banks recapitalisation plan of Rs 2.11 lakh crore in a bid to shore up their finances, boost private investment and revive the economy. The plan is expected to be spread over two years to bolster banks' finances and revive the economy and is the largest such undertaking in India to date.

The bank recap plan boosted the foreign portfolio inflows into equities, which grew sharply in October. In September, outflows were recorded.  India’s foreign exchange reserves were at USD 401.94 billion on November 30.

The RBI also said that with more cases being referred to the Insolvency and Bankruptcy Code (IBC), which is currently in the works, will enhance allocative efficiency.

Read more - RBI Monetary policy review: Key takeaways from the meeting

The policy document states that this is one of the three factors which will help in "reducing the cost of domestic borrowings through improved transmission by banks of past monetary policy changes on outstanding loans."

The Committee assesses that the recapitalisation, among the other developments in the last two months,  has helped to bring up the sluggish growth. The capital infused has helped in raising the market by setting up new projects.
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