NEW DELHI: While keeping interest rates unchanged, Reserve Bank of India Governor Shaktikanta Das on Friday announced a slew of new, unconventional measures to boost economic activity. In order to make borrowing cheaper for states, the RBI will buy bonds issued by state governments via secondary market open market operations (OMOs).
While such measures are routine for central government securities, this is the first time such an action is being taken for state government bonds. Experts say, the move should help ease liquidity concerns
at a time when large revenue slippages and uncertainty over GST compensation payments have left state governments desperate for cash.
“In order to impart liquidity to SDLs (state development loans) and thereby facilitate efficient pricing, it has been decided to conduct OMOs in SDLs as a special case during the current financial year,” said Das. RBI has also doubled the quantum of liquidity infusion into the market through the purchase of government securities to Rs 20,000 crore.
This, along with the extension of the enhanced held-to-maturity limit for banks to 22% of net demand and time liabilities from 19.5% till March 2022 is expected to support government borrowing programmes. “This is indeed is a pre- Diwali Dhamaka for bond markets,” said Lakshmi Iyer, Chief Investment Officer (Debt) & Head-Products, Kotak Mahindra AMC. The benchmark 10-year G-Sec yield rallied around 10 bps after the announcement to around 5.93 per cent.
According to the newly-appointed chairman of SBI, Dinesh Kumar Khara, the policy overall is fixated to revive growth and has attempted to prepare a conducive ground for the same. To enhance credit flow, the policy has also targeted specific sectors with high forward and backward linkages, and multiplier effects on growth such as the real estate and retail sector. Das has nudged banks to open their purse strings to ensure there is easy money supply for crucial sectors through a series of measures. These include introduction of on-tap targeted long-term repo operations (TLTRO) for banks to borrow up to Rs 1 lakh crore and invest in corporate bonds and other debt instruments.
Banks can use these funds to extend loans to specific sectors, a factor absent in earlier TLTROs. “This will ensure comfortable liquidity in the banking system. However, it is to be noted that the earlier TLTRO 2.0 did not enjoy success as only Rs 12,500 crore out of the announced Rs 50,000 crore was availed,” cautioned Madan Sabnavis, chief economist at Care Ratings.
Steps to ease credit flow
...the additional measures announced by the RBI to support growth in the form of liquidity support, reviving exports, credit support, and improving ease of doing business, are expected to give the much-needed impetus to drive the three-speed recovery which RBI expects
Chandrajit Banerjee, Director General, CII
RBI’s decision to extend the scheme for co-lending to all NBFCs, HFC in respect of all eligible priority sector loans will allow greater operational flexibility to the lending institutions and is much welcomed.Particularly, this step would benefit borrowers of higher value loans”
Niranjan Hiranandani, President, NAREDCO & ASSOCHAM
The policy had a lot of positives for the bond markets - doubling of the OMO amount, introduction of OMOs in SDLs, on tap TLTRO of up to `1 lakh crore and extension of enhanced HTM limits up to March 2022 for securities acquired between September 1, 2020 and March 31, 2021 are all encouraging...
Shanti Ekambaram, Group President - Consumer Banking, Kotak Mahindra Bank
The decision to increase the exposure limits on individual retail loans from `5 crore to `7.5 crore would benefit both individuals and the small businesses that are currently gasping for liquidity support... Discontinuation of automatic caution listing system will benefit the exporters as it was a long pending request of FICCI
Sangita Reddy, President, FICCI