INSUBCONTINENT EXCLUSIVE:
the financial market in its use of innovative tools for nurturing the fledgling growth recovery in the economy to address the broken link of
credit availability and delivery due to crises in the NBFC sector, NPA resolution in the banking sector and the ongoing restructuring
exercise among the PSU banks
these tools is the announcement of CRR exemption for incremental bank loans to certain segments that will lower delivery of credit costs to
Extension of the restructuring scheme on MSME loans and projects in the commercial real estate sector may release some capital for banks in
the short term while allowing breathing space to such concerned sectors
We concur with RBI assessment that credit support to these sectors will have large multiplier effect on growth.
Further, the announcement of
a Long Term Repo Operation (LTRO) of 1 year and 3-year tenor up to a total amount of ?1 lakh crore at the policy repo rate is a
short end of the bond curve
Such concern is now more than adequately addressed by the LTRO as frontend G-sec yields have fallen between 15-25 bps with collateral
benefits to spread assets
We expect the spread of sovereign curve over repo to compress even more as we go along.
Additionally, RBI through LTRO seems to be
banking liquidity and its rate, unlike the Operation Twist or OMO, which was directed at all participants
We expect that depending upon the experience gathered in first tranche of ?1 lakh crore, RBI may consider another LTRO directly linked with
incremental credit to specific sectors that might have a more pronounced nudge effect to lend with cheaper resources.
Global central banks
have used yield curve management tools only when conventional monetary policy space seemed limited
by RBI has abandoned the stance of liquidity to be kept in marginal deficit and has shifted the main liquidity management tool from the
overnight repo to the 14-day term repo/reverse repo
This measure is likely to push banks to borrow/lend from each other instead of the RBI for daily liquidity management
It is also plausible this move will gravitate weighted average call rate in the direction of the policy corridor of MSF and reverse repo
depending on the system liquidity balance
Also the removal of quantitative restrictions (earlier system liquidity around 1% of NDTL) does suggest that the size of OMO bond purchases
and/ or Operation Twists will no longer be constrained by liquidity consideration
This should assist in further reduction of the term premia in the sovereign curve
More steps like quantitative assessment of durable liquidity conditions and its publication on a fortnightly basis and periodic
consultations with participants are welcome developments.
RBI announced other measures like deepening of the rupee interest rate derivative
market, which will encourage higher non-resident participation and enhance the role of domestic market makers in the offshore market
It will also improve transparency and achieve better regulatory oversight.
In summary, there is no denying that at a time when fiscal and
monetary policy space to boost the growth impulse is limited, the RBI has been able to maximise its support for growth through
unconventional monetary policy measures which would improve both cost and availability of credit
benign monetary policy environment
