Shaktikanta Das_RBI_Reserve bank
Every single economist predicted status-quo in key policy rates on Wednesday. The markets too had factored in this possibility. But RBI Governor Shaktikanta Das had his plan ready to present a ‘dovish’ policy even without rate action.
The RBI policy announced on April 7 offered the right liquidity guidance for financial markets and assurance to lenders. To be fair, with inflation concerns remaining and growth scenario weak, the RBI could not have tinkered with the rates. Das and his team at MPC (monetary policy committee) had limited options before them in such a scenario.
Yet, Das played his cards well. Through a series of announcements relating to liquidity and lending support schemes, Das conveyed to the markets that the RBI has got its arsenal ready to ensure the mega government borrowing programme goes through smoothly and banks, development financial institutions will have enough funding support to aid productive sectors. The massive, Rs 1 trillion G-Sec purchase programme needs to be seen in the context of central bank’s efforts to ensure market discipline. These announcements are important as a resurgence in Covid cases threatens the nascent economic recovery and brings back fears of another economic slowdown.
“While policy rates have been kept unchanged, RBI has announced a G-Sec Acquisition Program (GSAP) of Rs 1 lakh crore in Q1FY22 with as much as Rs 25,000 crore of OMO purchase lined up on 15 April 2021,” said Sameer Narang, Chief Economist, Bank of Baroda. “This should give markets ample comfort on the extent of RBI purchases in the near-term and provide adequate durable liquidity when CRR increase would absorb some of the surplus liquidity. Notably, RBI’s net purchases in FY21 were Rs 3.13 lakh crore and this sets the tone for a similar of higher purchases in FY22,” he said.
Das, during his news conference, reiterated that the central bank is keen to have an orderly movement in the financial markets and would not want excess volatility to take hold. Among the most important announcements were the extension of the Targeted Long Term Repo Operations (TLTRO) scheme till September, 30 from March 31. This is big news for 26 sectors allowed to benefit under this scheme.
How TLTRO works?
Under this scheme, liquidity availed by banks can be deployed in corporate bonds, commercial paper, and non-convertible debentures issued by entities in these sectors. It can also be used to extend bank loans and advances to these sectors. Investments made by banks under this facility can be classified as held to maturity (HTM) even above the 25 percent of total investment permitted to be included in the HTM portfolio. All exposures under this facility are exempted from reckoning under the large exposure framework (LEF). All this means, this gives a free-hand to the banks to draw funds and put the money where it is required.
Secondly, the RBI announced Rs 50,000 crore liquidity support to All India Financial Institutions to lend to productive sectors. This money will go to NABARD (Rs 25,000 crore) which will be used for on-lending to support agriculture and allied activities, the rural non-farm sector and non-banking financial companies-micro finance institutions. Also, Rs 10,000 crore will be extended to National Housing Bank for one year to support the housing sector.
Further, to meet the funding requirements of micro, small and medium enterprises (MSMEs), SIDBI will be sanctioned Rs15,000 crore under this facility for a period of up to one year. Das said all these three facilities will be available at the prevailing policy repo rate.
Another two key announcements, which will help to increase lending are the extension of banks’ on-lending facility to NBFCs by another six months and hiking the limit of farm credit to Rs 75 lakhs per borrower that can be availed by farmers against agricultural produce.
RBI cheers bond market
Das has exercised extreme caution not to give a signal to the markets that there will be any kind of early-withdrawal of liquidity measures either via rate tightening or liquidity roll back. The growth target for FY22 has been retained at 10.5%. The slight increase in the CPI inflation target is realistic and the promise of continuing liquidity support soothes the markets. Das’ announcement indeed cheered the markets — both equity and bonds. At the time of writing this piece, the benchmark Sensex is trading 569 points up or 1.16% from the previous close and the 10-year G-Sec is trading at close to 6.07% down 5 bps from the previous levels.
The stance remains accommodative ‘as long as necessary’ to support growth. All put together, without announcing a rate cut, Das has delivered a dovish policy. Over to the government now to reciprocate with more fiscal measures to support growth.
But, what about savers?
But, the RBI Governor was largely silent on the sharp decline in savings rates throughout his statement. The decline in interest rates is already hurting the savers more than it is benefitting borrowers. Savers are actually earning negative returns if one adjusts the inflation. The Government rolling back the recent sharp cut in small savings rate may have come as a temporary relief but it won’t be long before the rates are aligned to the broader interest rate trend in the financial system.
The Central bank has consistently ensured that the G-Sec yields remain within the range using a barrage of liquidity tools including back-to-back Open Market Operations. This is to help Government borrow at a lower cost. Economists have opined that this creates an artificial distortion of rates in the financial system. But, the central bank has not yet commented on the hard impact lower rates have on savers, especially retirees. “But, I guess the RBI is okay with that,” said a leading economist who didn’t want to be named.
Also, an easy monetary policy also hurting the Rupee. The Indian Rupee further fell to trade close to 74 per US Dollar on Wednesday after the RBI announced that the accommodative policy stance will continue. “Investors feared capital flight in a low interest rate regime,” said the same economist quoted above. To cut a long story short, the RBI’s current liquidity stance is cheering bond markets, but is hurting the savers and the Rupee.