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The Monetary Policy Committee of the Reserve Bank of India (RBI) Friday kept the repo rate unchanged at four per cent. Consequently, the reverse repo rate, at which the RBI borrows from lenders, stood at 3.35 per cent. This is the second time in a row the apex bank has kept the key rates unchanged.

MPC is the statutory committee that fixes the key policy interest rate and monetary policy stance of the country as well as the inflation target.

The RBI decided to maintain its accommodative monetary policy stance to support growth amid the pandemic.

RBI keeping the repo rate unchanged was expected by many market participants due to the rising inflation and growth uncertainty in the country.

Impact on borrowers: Borrowers who are facing salary cut/job loss due to the novel coronavirus pandemic situation and were looking for some reduction in their equated monthly instalment (EMI) burden will have to wait a little longer. On the other hand, no change in policy rates means good news for fixed deposit (FDs) investors as banks may go slow on cutting interest rates on FDs.

Growth projection

RBI Governor Shaktikanta Das projected GDP to contract 9.5 per cent in the current financial year, which ends in March 2021. A silver lining, said Das “is visible and mood of the nation has shifted from despair and fear to confidence and hope”. Modest recovery in first half of the year, he said “could further strengthen in second half… economic activity to gain traction in third quarter.”

Governor Das said that if the current momentum of upturn gains ground, faster and stronger rebound is imminently visible.

Likely to be a three-speed recovery: “GDP growth may break out of contraction and turn positive by Q4,” said Das adding that there is a debate raging on whether the economic revival will be V-shaped, U-shaped, L-shaped or W-shaped. He said that in his view it is likely to be a three-speed recovery with individual sectors showing varying paces depending on sector-specific realities. Das said that the sectors that showed resilience in the face of the pandemic are likely to be the ones to revive first. The Governor said agriculture, power, consumer goods, pharma and two-wheelers will see quick recovery.

To drive his point home the point of a strong rebound he highlighted the uptick in manufacturing sector and energy consumption, among others.

Fresh measures to arrest the downtrend

Governor Das announced a range of new, unconventional measures to push economic activity. These include:

— One major announcement was that the RBI will make real-time gross settlement (RTGS) 24x7x365 from December.

— It also rationalised risk weightage on home loans, meaning all new housing loans risk will be linked only to loan to value.

— Ways & Means Advance (WMA) limit for the Centre was kept at Rs 1.25 lakh crore

— On-tap TLTRO for Rs 1 lakh crore at 4% till March 2021 was announced.

— Besides, OMO worth Rs 20,000 crore will be conducted next week.

— RBI will conduct special and outright bond purchases

Governor Das “has done everything under his control, except cutting rates, to keep interest rates low through the bonds. The bullish sentiment will remain,” a fund manager said after the policy.

On his part, Das said that “market participants should be assured that in keeping with the monetary policy stance announced today, the RBI will maintain comfortable liquidity conditions and will conduct market operations in the form of outright and special open market operations.”

Inflation worries

The RBI Governor said inflation is likely to remain at elevated levels in September, and ease in the third and fourth quarters of current financial year.

The decision to keep the benchmark policy rate unchanged at 4% thus, comes in the backdrop of RBI’s continuing battle with stubbornly high inflation.

Retail inflation, the policy-setting yardstick, has stayed above 6% for quite a few months. It may be noted that the RBI is tasked with keeping inflation at 4%, with a give-or-take of 2 per cent on either side.

Interest rates have been reduced by as much as 115 bps this year, but indications in the run-up to the meet were that RBI would likely turn more watchful now in view of the inflation scenario.

Sovereign bond market upbeat

Sovereign bond market were upbeat as Governor Shaktikanta Das gave investors an unbridled commitment to support them.

The RBI is now open to not only pump in more targeted liquidity but also take a large helping of sovereign bonds onto its plate. More importantly, it is willing to turn an investor in state development bonds for the first time.

Starting next week, the size of the open market operations (OMO) to buy government bonds will be increased to ₹20,000 crore from around ₹10,000 crore. Bond traders have been asking for more OMO purchases instead of the operation twist auctions the RBI conducts.

Besides central government securities, the sharp rise in state government bonds also seems to have finally caught the attention of the RBI. Das said that the central bank will start buying state bonds through OMO auctions although he didn’t elaborate on the size or timing of such auctions. Nevertheless, the fact that the RBI is willing to buy state bonds, a first for it, is enough to cheer markets.

The intent is to make it easier and cheaper for corporates to borrow from banks as well as the corporate bond market.

Boost to Real Estate

The RBI rejigged rules for new home loans to boost the real estate sector. Under the current regulations, differential risk weights are applicable to individual home loans, based on the size of the loan as well as the loan-to-value ratio (LTV). “In recognition of the role of the real estate sector in generating employment and economic activity, it has been decided to rationalise the risk weights and link them to LTV ratios only for all new housing loans sanctioned up to March 31, 2022,” the RBI chief Shaktikanta Das said.

This measure is expected to give a fillip to the real estate sector. This move will likely make more credit available to borrowers, particularly for the higher value loans.

LTV means how much the value of the the property a bank can lend to a borrower. If risk weights rise, a bank has to make more provisions and thus the banks’ ability to lend gets restricted.

“Measures like rationalisation of risk weights to all new housing loans until March 2022 would give a fillip to housing loan growth. The RBI has also extended the scheme for co-lending to all NBFCs and HFCs which will ease credit availability for the real estate sector. Broadly these are positive and welcome steps by the RBI,” said Shishir Baijal, Chairman & Managing Director, Knight Frank India.

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