RBI's monetary policy committee has delivered a policy on expected lines. The policy rates unchanged at 4% percent and the reverse repo rate at 3.35%.
The policy is carefully crafted to be in sync with the budget. Several liquidity boosting measures announced in the policy will support the massive borrowing program that the government has undertaken.
RBI Governor Shaktikanta Das announced that the central bank remains committed to ensuring there is ample liquidity in the financial system.
Here are the main takeaways from policy and their impact:
1. Extension of TLTRO scheme
The RBI has finally opened up the doors of the NBFCs to access on tap TLTRO funds. The Targeted Long Term Operations (TLTRO) scheme is available up to March 31, 2021.
Under this program, banks could avail liquidity of up to Rs 1 trillion at a floating rate and deploy them in corporate bonds, commercial paper and non-convertible debentures issued companies in some sectors.
NBFCs after the initial exclusion, are now permitted to utilize these funds for incremental lending to the specified stressed sectors. This is a significant step considering that NBFCs are facing a liquidity crunch since an array of defaults by Infrastructure Leasing & Financial Services (IL&FS) in September 2018. The covid-19 pandemic only aggravated their problems and their lending activities are severely impacted.
2. Retail participation in G-Sec market:
The RBI has granted direct access to retail investors in the G-Sec market. Retail investors will be allowed to open direct gilt accounts with the RBI.
They will soon be able to buy and sell government securities directly.
This move allows retail investors to directly invest in the safest fixed income instruments in the country as G-secs come with a sovereign guarantee.
Usually, the government securities market is dominated by institutional investors like mutual funds, banks, insurance companies. By allowing this access to retail investors, India has entered into a group of only a handful of countries that provides this facility.
This move will also expand the investor base and ease the government's fund raising program.
3. Restoring CRR:
The RBI has also decided to restore cash reserve ratio (CRR) of banks to previous levels. It will be done in two phases. In the first phase, the CRR will be raised to 3.5% from March 27 and subsequently to 4.0% from May 22.
The RBI had reduced the CRR requirement of all banks by 100 basis points to 3.0% of net demand and time liabilities (NDTL) beginning March 28, 2020.
With RBI pushing CRR to pre-covid levels, the interest rates are likely to go up for borrowers. On the other hand, fixed deposit investors will also start getting higher interest on their deposits after earning abysmal returns last year.
4. Relaxation in HTM and MSF categories:
To provide further support to the center's borrowing program, the RBI has extended the time limit for Held-to-maturity (HTM) instruments till March 31, 2023. The limit under HTM category is also increased from 19.5% to 22% of net demand and time liabilities.
The Marginal Standing Facility (MSF) relaxation is also increased for six months- upto September 2021. It will allow participant banks to dip into the statutory liquidity ratio (SLR) cumulatively up to 3% of NDTL. This is expected to unlock Rs 1.53 lakh crore liquidity for banks.
