Even though the Reserve Bank of India today kept its repo rate steady at 5.15%, it announced several measures to boost credit growth, a move that spurred some analysts to describe today’s action as ‘Budget Part II’. This was RBI’s first policy announcement after Finance Minister Nirmala Sitharaman presented Budget 2020 on Saturday. Stock markets welcomed RBI’s announcement and Nifty Bank index today rose nearly 1% today.
“Despite no cut in the policy rate, measures announced in this meeting are welcome. In a way, easing has resumed after a pause last time,” said Aditya Narain, head of research at Edelweiss Securities.
The RBI today removed a mandatory requirement for banks to set aside cash of 4% for every new loan extended to retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs). This exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020. The RBI also said that loans by banks to medium enterprises will be linked to an external benchmark, effective April 1, 2020.
The central banks said that linking of loans to external benchmark will help strengthen monetary transmission. The RBI had made mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to micro and small enterprises to an external benchmark from October 1, 2019.
“Linking credit to medium industries to external benchmark, removal of CRR (cash reserve ratio) requirement on fresh retail housing and auto loans and credit to MSME are positive steps. These steps may marginally reduce the interest rates on such fresh loans. The removal CRR select loans (about 15% of banks’ outstanding loan book) is also likely to give a temporary boost to banks’ net interest income, Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers on the RBI Monetary Policy.
Anusha Raheja, BFSI research analyst at LKP Securities, said the CRR exemption till 31 July will reduce the funding cost of the banks and will provide added incentive to lend more.
The RBI also surprised the Street by announcing longer-term repo operations to spur credit growth in the struggling economy.
Reminiscent of the European Central Bank’s Long-Term Refinancing Operation, the RBI said it will inject up to ₹1 trillion via one- and three-year long-term repos at the repurchase rate starting February 15. The move will allow lenders to borrow cheaply from the RBI.
“It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges the Indian economy faces in terms of sluggishness in growth momentum,” Governor Shaktikanta Das said.
“After a while we are seeing a credit policy more than a monetary policy,” said R. Sivakumar, fund manager at Axis Asset Management, on Twitter.
Lakshmi Iyer, CIO (Debt) & Head of Products at Kotak Mahindra Mutual Fund said described today’s action by RBI as a “masterstroke”.
“The masterstroke by the RBI is announcement of LTRO (Long term repo operations) of 1 year/3 year tenor for up to 1 lakh crore at repo rates. This a step towards credit transmission and demonstrates RBI intent towards supporting growth. Also, CRR exemption for incremental lending to auto, residential housing, MSME is a good way to chanelise credit in area where demand has not met with commensurate supply.”
“Overall, today’s move will help anchor bond yields to maintain a stable/ easing bias,” she said.
The RBI today also allowed banks to continue to treat as ‘standard’ defaulting loans to commercial real estate borrowers if the repayment delays were due to reasons “beyond the control” of the company.