RBI – SENSIBLE ECONOMICS

about 12 months ago
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While remaining aggressively accommodative without cutting rates, RBI did a very good job.

RBI did deliver a block buster policy for the bond dealers! On-tap-TLTRO worth Rs.20,000 crore to be conducted next week. Everything remained status quo on the interest rate front.  

And the other big positive is the change in the way home loan rates is given –all new housing loans risk will be linked only to loan to value. This means, the rate of interest you pay depends on the capital you bring in while going for the loan. For eg: If you are buying a house worth Rs.10 crore, and you bring in Rs.5 crore or Rs.6 crore, the interest rate will vary, depending on how much more you bring in – lower the loan value, lower is the interest rate. And it will be much more safer for the banks and housing loan companies though it’s a different issue that it is not the home owner who dupe the banks but the big corporate big wigs!

RBI this time, kept it eye on the growth, stating that FY21 real GDP is expected to contract by 9.5%, with risks tilted to the downside. On the inflation front, RBI said that CPI will remain elevated in the September print and ease gradually in Q3 and Q3 – the message which we get from this is that inflation will remain elevated but RBI will pay attention to getting the economy back on its feet. RBI Governor, in his speech said, “The MPC has hence decided to look through the current inflation hump as transient and address the more urgent need to revive growth and mitigate the impact of COVID-19.”

Clearly, RBI has time-and-again showed us during this pandemic that it has so many more tools; tinkering with the interest rate is just one of them and need not be the whole and soul of the policy decisions.

A quick look at the policy highlights:

  • Repo rate, reverse repo remains unchanged at 4% and 3.35% respectively.
  • Marginal standing facility (MSF) rate and the Bank Rate remains status quo at 4.25%
  • To continue with its accommodative stance as long as necessary – at least during the current financial year and into the next financial year.
  • Real GDP growth for FY21 expected at -9.5%; in Q2FY21 at -9.8; om Q3 at -5.6% and it turns positive only in Q4 at 0.5%. Real GDP growth for Q1FY22 is placed at 20.6%.
  • CPI inflation is projected at 6.8% for Q2FY21; at 5.4-4.5% for H2FY21 and 4.3% for Q1FY22.
  • Limit for Ways and Means Advances (WMA) for the centre has been kept higher at Rs1.25 lakh crore compared to Rs.35,000 crore in H2 of the previous year. Similarly, the 60% increase in WMA limit for states in the first half of 2020-21 has been extended for a further period of 6 months till March 31, 2021.
  • After NEFT, now RTGS transfer to be available on a 24x7x365 basis, effective from December 2020.

On TLTRO

  • On tap TLTRO with tenors of up to three years for a total amount of up to Rs1,00,000 crore at a floating rate linked to the policy repo rate.
  • The scheme will be available up to March 31, 2021 with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme.
  • Banks that had availed of funds earlier under targeted long-term repo operations (TLTRO and TLTRO 2.0) will be given the option of reversing these transactions before maturity.

SLR Holdings in Held to Maturity Category

  • To extend the dispensation of the enhanced HTM limit of 22 percent up to March 31, 2022 for securities acquired between September 1, 2020 and March 31, 2021.
  • It is expected that banks will be able to plan their investments in SLR securities in an optimal manner.
  • Open Market Operations (OMOs) in State Development Loans (SDLs) 22.
  • In order to impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year.
  • This measure, along with the extension of HTM till March 2022, should ease concerns about illiquidity and absorptive capacity for the total government borrowing in the current year.

Export Support: Review of system-based automatic Caution Listing of Exporters

  • In order to facilitate the same, and make the caution-listing process exporter-friendly and equitable, it has been decided to discontinue the system-based automatic caution-listing.
  • The RBI will henceforth undertake caution-listing on the basis of case-specific recommendations of the Authorised Dealer (AD) banks.

Revised Regulatory Limits for Retail Portfolio of Banks

  • Maximum aggregated retail exposure to one counterparty which mainly consists of individuals and small businesses (i.e. with turnover of upto Rs.50 crore), and in harmonization with the Basel guidelines increased from Rs.5 crore to Rs.7.5 crore in respect of all fresh as well as incremental qualifying exposures.
  • This measure is expected to expand credit flow to small businesses.

Rationalisation of Risk Weights on Individual Housing Loans

  • Currently, differential risk weights are applicable to individual housing loans, based on the size of the loan as well as the loan-to-value ratio (LTV).
  • RBI has decided to rationalise the risk weights and link them to LTV ratios only for all new housing loans sanctioned up to March 31, 2022.
  • This measure is expected to give a fillip to the real estate sector.

Review of the Co-origination Model

  • Co-origination of loan model extended to all NBFCs, including HFCs, in respect of all eligible priority sector loans, and allow greater operational flexibility to the lending institutions.
  • This “Co-Lending Model” is expected to leverage the comparative advantages of banks and NBFCs in a collaborative effort, and improve the flow of credit to the unserved and underserved sectors of the economy.

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