Governor Das addresses the twin challenges of excess liquidity and large Government borrowing
The industry is encouraged to note further financial inclusion remains a top priority for both the Government and the Central Bank, especially the fresh surge in COVID in the country is worrying and lockdown could lead to the undoing to gain made over the past few months.
Stating this in comments on RBI’s monetary policy announced on 7 April, FICCI President Uday Shankar said, “The status quo with regard to the repo rate was anticipated given the inflation concern.
“However, the bias indicated by the Central Bank towards maintaining an accommodative stance is reassuring. The fresh surge in COVID infections is worrying and the imposition of local lockdowns can undermine the recovery prospects over the near term. At this juncture, it is critical to ensure that the gains made over the past few months are not undone.
“We are happy to note RBI’s commitment towards maintaining conducive liquidity situation over a longer horizon amidst continued uncertainty. The extension of schemes like on-tap TLTRO for specific sectors and bank lending to NBFCs for on-lending to agriculture, MSME, housing sectors as priority sector lending; the additional refinancing facility provided for SIDBI, NHB, & NABARD; and the relaxation in the period of parking of External Commercial Borrowing (ECB) proceeds in term deposits are all positive steps.”
“Also, the Central Bank’s announcement to initiate the secondary market G-Sec acquisition program (G-SAP 1.0) from the first quarter of the current fiscal year will ensure financial stability especially amidst the recent volatility witnessed in the yield rates. This is also a positive signal towards meeting the large fiscal borrowing programme of the government,” he said.
“Lastly, it also encouraging to note that furthering financial inclusion remains a top priority for both the Government and the Central Bank. The enhancement of limit of maximum balance in accounts of Payments Banks to Rs.2 Lakh per individual and the extension of Centralised Payment Systems (CPS) – RTGS and NEFT – membership to non-bank payment system operators like Prepaid Payment Instrument(PPI) issuers, card networks, white label ATM operators and Trade Receivables Discounting System (TReDS) platforms are right steps in the Central Bank’s endeavour to extend reachability of formal financing to those at the bottom of the pyramid,” Shankar said on 7 Apr 2021.
The financial industry officials also appreciated RBI’s latest policy.
“The Monetary Policy Committee (MPC) delivered a balanced policy statement supporting growth while keeping an eye on inflation. The continuation of the accommodative stance, the announcement of G-sec purchases through the G-Sec Acquisition Programme (GSAP) and introduction of term repos, should anchor interest rates,” said Zarin Daruwala, Cluster CEO, India and South Asia markets (Bangladesh, Nepal and Sri Lanka), Standard Chartered Bank.
“The six-month extension to the on-tap targeted long-term repo operations (TLTRO) scheme as well as to the scheme for priority sector lending (PSL) classification of bank loans to NBFCs for on-lending should help improve targeted credit delivery. The Rs.50,000 crore support offered to SIDBI, NABARD and NHB will also augment credit growth. The hike in threshold for farmer working capital loans that would qualify as PSL lending, augurs well for the rural sector,” Daruwala said.
The announcement of the much awaited secondary market government security acquisition programme (GSAP 1.0) should go a long way in quelling the bond market’s anxieties regarding the size of the Central and State Government borrowing programme for FY2022, added N. Sivaraman, MD & Group CEO, ICRA Limited on RBI Monetary Policy announcement.
The GSAP 1.0 is to purchase government bonds worth Rs.1 trillion from the secondary market in the first quarter of this fiscal. The first purchase of Rs.25,000 crore will take place on 15 April.
“Moreover, we believe that the Government of India’s fiscal deficit undershot the FY2021 Revised Estimates by a margin of Rs.1.3-1.5 trillion. With the cancellation of only Rs.0.2 trillion of planned market issuance, we expect that the Central Government has started FY2022 with a comfortable cash balance, which should also keep bond yields tempered in the near term.
“Regardless, global factors such as US treasury yields and commodity prices, and the impact of the latter on domestic inflation, will influence yields. We expect the 10 year G-sec yield to range between 6.05% and 6.15% in the next two months,” said Sivaraman.
While the policy stance and decision is along expectations, the RBI Governor’s statement has rightly tried to address the twin challenges of excess liquidity and large Government borrowing, according to Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund.
“The decision to announce longer term Variable reverse repo and an upfront QE style market intervention needs to be seen in this context. This should enable a gradual normalization of money market rates as well as a reasonable support to ensure a smooth borrowing program.
However, given the overhang of surplus liquidity, active absorption may be warranted as the year goes in a gradual manner to ensure a stable growth inflation balance along with financial stability, said Radhakrishnan.
“While laying out the liquidity management strategy for 2021-22, let me unequivocally state that the Reserve Bank’s endeavour is to ensure orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof. Our objective is to eschew volatility in the G-sec market in view of its central role in the pricing of other financial market instruments across the term structure and issuers, both in the public and private sectors,” said RBI governor Shaktikanta Das.
With this announcement, RBI has satisfied a long-standing demand of the bond market of an open market operation (OMO) calendar. So far, RBI had been announcing standalone and special OMOs to bring down yields, refusing to divulge details of a calendar in advance. This move of announcing an OMO calendar will give much-needed clarity to the bond market which is staring at a government borrowing programme of Rs12 trillion this financial year.
The central bank has also kept interest rates unchanged, as was widely expected, and also maintained its accommodative monetary policy amid concerns that rising coronavirus infections could derail the nascent economic recovery. #banking #financial #debts #bonds #liquidity /fiinews.com
