RBI: Easier housing loans, promise of liquidity – What RBI announcements mean for you

NEW DELHI: Even though the central bank did not do anything as far as policy rates are concerned, it came out in full support for the market and economy by announcing a number of measures to help them stand on their feet.

RBI Governor and monetary policy committee (MPC) chairman Shaktikanta Das vowed not only to maintain liquidity in the market but also announced measures to bring the yields down and make borrowing for states cheaper.

These announcements, especially in the context of a second stimulus package that the market hopes the government will announce soon, may give a much needed boost to the economy.

“The policy measures recognize the growth risk the economy faces and the imperativeness of providing liquidity for growth. Once inflation, which remains a supply-side disruption currently, softens, RBI should be willing to cut rates and we expect at least a 35 basis cut this FY. The decision to hold rates steady would also help to protect margins of banks as a majority of the loan book is linked to the repo or other floating benchmarks,” said R K Gurumurthy, Head of Treasury at Lakshmi Vilas Bank.

Here are key takeaways from the RBI policy meet outcome:

RBI announced on-tap TLTRO (Targeted Long Term Repo Operations) worth Rs 1 lakh crore to make sure there is easy money supply for corporates. Under the scheme, banks can borrow money from RBI at repo rate to buy corporate bonds, commercial papers, and non-convertible debentures issued by companies in specific sectors.

Why should I care? The pandemic has depleted the supply of cash at many commercial organisations, to an extent that they may default on their obligations and even shut operations (meaning job losses). Money supply at low rates will give them hopes to stay afloat, which in turn, will provide a chance to save jobs and keep operations running.

  • OMOs for state governments

RBI also announced that it will conduct open market operations (OMOs) in State Developments Loans (SDLs), which will keep borrowing rates low for state governments. In OMOs, RBI buys government securities from the market, which raises bond prices and in turn lowers interest rates.

Why should I care? With GST collections dwindling, state governments have been grasping for cash to keep health and regular programmes running. Moreover, the state governments have been borrowing money from the market at relatively higher rates, so they will benefit from the OMO.

In its economic outlook, RBI said economic growth will return to positive territory by Q4 of the current fiscal. The central bank also said FY21 GDP contraction will be 9.5 per cent, which is lower than many agencies that projected a double-digit decline.

Why should I care? India is the most affected major economy due to the pandemic as it has seen severe contraction in GDP. Any contraction in the economy negatively impacts all classes of people. So, hopes of an earlier recovery should bode well for the nation.

  • Bumper kharif crop sowing

Amid all the doom and gloom, RBI said kharif crop sowing has already surpassed last year’s acreage as well as the normal sown area, which means, if everything remains well, there will be a record produce.

Why should I care? A bumper crop not just ensures food security but also keeps the rural economy running. The rural economy has already proven its mettle during the pandemic as sales of tractors and fertilisers have increased. It was also the only sector that showed growth in the Q1 GDP report. So, this will provide an extra cushion to the economy.

In the September 2020 round of the RBI’s survey, households expect inflation to decline modestly over the next three months, indicating that supply chains are mending. RBI projections indicate that inflation would ease closer to the target by Q4FY21.

Why should I care? Inflation is something that eats your money’s worth. A relatively higher inflation is also keeping RBI from further lowering the policy rates. So, if inflation cools off, we can see some more action from the central bank to support the economy.

Governor Das said market participants and the RBI share a common set of expectations, which, in turn, should engender orderly market conditions. Assuring market participants of access to liquidity and easy financing conditions, he promised to undertake further measures. He also assured that the borrowing programme of the Centre and states for the rest of FY21 will be completed in a non-disruptive manner without compromising on price and financial stability.

Why should I care? Markets are already close to their pre-Covid levels thanks to hopes of recovery and constant support from central banks and the government. Promise of more support will keep the market buoyant, increasing wealth for investors.

The central bank said in response to feedback from market participants, the size of these auctions has been increased to Rs 20,000 crore. Earlier, RBI was buying bonds mostly in tranches of Rs 10,000 crore.

Why should I care? As explained earlier, bond buying by RBI keeps yield in check, so as it buys even more G-Secs, yields and borrowing costs for companies will come down further. Debt mutual fund investors should also cheer as lower yields mean higher NAVs for their funds.

  • Rationalisation of risk in home loans

RBI said it has decided to rationalise the risk weights and link them to loan-to-value ratio for all new housing loans sanctioned up to March 31, 2022. This is against the usual practice of differential risk weights based on the size of the loan as well as the loan-to-value ratio. “Rationalization of risk weights is positive for banks. But not mentioning housing finance companies may be a near-term dampener for housing finance stocks,” said Amar Ambani, Senior President & Institutional Research Head, YES Securities.

Why should I care? This announcement will definitely encourage banks to lend more to individual homebuyers without feeling the stress on their balance sheets, said a realty analyst. RBI also believes the measure is expected to give a fillip to the real estate sector, which is one of the biggest generators of employment and economic activity.

In order to facilitate swift and seamless payments in real time for domestic businesses and institutions, it has been decided to make RTGS system available round-the-clock from December 2020.

Why should I care? RTGS is primarily meant for large transactions. Availability of the system 24×7 means businesses and individuals will not have to wait for opening of banks to transfer large amounts. This will also facilitate innovations in large value payments ecosystem and promote ease of doing business, said RBI.

To support growth, MPC said it will wait for inflationary pressures to ease. Most members of the committee are in favour of keeping an accommodative stance, at least during the current financial year and into the next financial year.

Why should I care? Reduction in policy rate cuts affect all loans down the line. So, if repo rates are lower, you will pay lower interest on home loans, auto loans and so on.

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