Looking beyond policy rates & liquidity ratios
Mr. Das is a different Governor of Reserve Bank of India, having focus where none looks at. No surprise that policy rates kept unchanged and so is SLR & CRR while extending benefit of additional HTM dispensation (19.5% to 22%) from March 2021 to March 2022. Governor also took a leaf out of FED in proclaiming that accommodative policy will remain till FY22, and that growth is more relevant for the real economy than inflation. Liquidity window got opened wider for TLTRO and (out of the box) OMOs for SDL to ensure that yield spread between GOI & SDL and GOI & Corporate bond get squeezed, thus extending RBI support beyond Central Government to State Governments and corporate borrowers. Needless to say, all these are music to the ears of borrowers without much damage for depositors who take comfort from rate status-quo! So, it’s win-all policy and kudos to Mr. Das who is emerging as street-smart Governor with attention on innovation & impact rather than theory & text books!
There was little on credit comfort to push lending to needy sectors, but small steps made look big…
RBI game plan is to push Banks to lend (taking credit risk on themselves) pushing liquidity into their balance sheet – compulsive lending to avoid placing surplus monies at 3.35-4%. The excess liquidity will flow between subscription to GOI/SDL bonds and to private wholesale borrowers, both of which is music to the ears of RBI. Support to retail & home loans (higher limit and risk weight concession on lower LTV) are incidental to the objective of ensuring credit flow to retail borrowers.
What’s the impact from strategy of using Reverse Repo & liquidity tool in the absence of rate cut bandwidth?
Major impact is on long term benefit to the system, by efficient cost management of escalating government borrowing despite headwind dynamics, artificial administration of 10Y benchmark yield at sub 6% is beyond imagination. Markets responded positively to the pied piper giving more funds at post-policy cut-off yield at 5.94% (against previous devolved auction at 6.02%) – lower cost of debt for the Government without rate cut is win-win for the Government and depositors. Private borrowers stand to benefit from spread squeeze and more funds from TLTRO refinance window. Relief for Banks is from the comfort to keep acquiring Gilts to the brim of 22% of NDTL (HTM limit) with less worry on the mark-to-market from extended dispensation to March 2022. RBI has the comfort to dip into excess SLR of 4% (22% retention against 18% requirement) for release of liquidity into the system at Repo rate at 4%, may be effecting Repo rate cut when this situation arises!
Financial markets got into bullish undertone on run upto monetary policy – NIFTY shifting play from 10800-11800 to 11650/11800-12300/12450 and Bank NIFTY in outperformance mode with upside break at 20400-22000 into 22650/23000-24350/25350. 10Y benchmark yield push back into 5.85-5.95% without rate cut is achievement of sorts for the Governor. Despite investors jitters at sub 6% yield, RBI’s stubbornness on yield containment will improve investors appetite for medium term price stability at 5.85/5.925-6.025/6.10% removing the risk of yield spike into 6.10-6.35%. So, all is well in financial markets, and GOI should be happy with (exceeding expectation) performance of RBI Governor!
Will all these lead to turnaround in real economy in H2/FY21? These could at best be catalyst to the main course from the North block!
Moses Harding
