RBI Policy Review: Accommodative with Liquidity Focus

In the monetary policy review, the RBI kept the repo rate unchanged at 4%, and all the other policy rates too, remain unchanged. The RBI will continue the accommodative stance of the policy for this financial year and into the next year depending upon the requirements of growth.

The RBI policy that has been announced is on expected lines and only a small constituent of the market expected a cut in the rates. That the retail inflation indicated by the CPI has been consistently above the RBI threshold of 6% is factor that has been standing in the way of further rate cuts. This was indicated by the RBI in the last policy announcement when they said they would be looking for deeper gains in inflation before any further rate action.

RBI considers the current uptick in inflation as a “transient hump”, and that the last quarter of the financial year may see inflation moderating. Much on the same line RBI has stated that the GDP growth for FY21 may be a contraction of 9.50%, and that in Q4 we may see positive growth.

In our view, it is not the rate cuts that matter from hereon, but the liquidity provision that the RBI makes from time to time to support the economy and the markets. This assumes great importance due to the fact that there is a huge government borrowing program that is yet to be completed. While such a market borrowing program is on, it has two clear consequences, one, it removes resources or liquidity from the markets to the government coffers, and two, when resources or liquidity is taken away by the government and the RBI the private sector will be denied the resources that it requires for growth. RBI has recognized this issue and has initiated a long-term repo facility to specifically address this issue.

Some of the impactful initiatives from the RBI are as follows:

1. On Tap TLTRO

“The focus of liquidity measures by the RBI will now include revival of activity in specific sectors that have both backward and forward linkages, and multiplier effects on growth.” To achieve this RBI has decided to conduct on tap TLTRO with tenors of up to three years for a total amount of up to ₹1,00,000 crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021. Liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers, and nonconvertible debentures issued by entities in specific sectors over and above the outstanding level of their investments in such instruments as on September 30, 2020. The liquidity availed under the scheme can also be used to extend bank loans to these sectors. This liquidity provisioning by the RBI will go a long way in meeting the needs of specific sectors which require credit at this juncture.

2. Open Market Operations (OMOs) in State Development Loans (SDLs)

With the intention of imparting liquidity to SDLs and to facilitate efficient pricing, RBI has decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year. This action is expected to “improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities.” This would also help in making further auctions in state government securities much easier when the targets are quite high.

3. More Room for Held to Maturity

In Sept. 2019, the RBI increased the investments permitted to be classified as Held to Maturity (HTM) from 19.5% to 22% of NDTL in respect of SLR securities acquired on or after September 1, 2020, up to March 31, 2021. To provide certainty to banks as regards their investments and for orderly market conditions, the enhanced HTM limit of 22% has been extended up to March 31, 2022, for securities acquired between September 1, 2020, and March 31, 2021. This will help banks to acquire and hold securities, and also plan the investment portfolio in a manner which is comfortable for the bank.

4. Revised threshold of Lending to Retail Clients

The maximum retail exposure to one counterparty should not exceed the absolute threshold limit of ₹5 crore
under the current rules. To facilitate higher credit flow to the retail segment which mainly consists of
individuals and small businesses, that is those with a turnover of up to Rs.50 Crs, RBI has enhanced this limit
to Rs.7.50 Crs. This will help in expanding the flow of credit to small businesses.


The assurance on accommodative policy and the continuing liquidity support, and the related measures
announced by the RBI, support both equity and bond markets. These measures will support a revival in
economic growth, and therefore economic and business performance. This will also go a long way in
supporting yields across the maturities and support stable markets. From an investment perspective, the
preferred segments will be the short and mid-segment of the yield curve. The probability of improvements in
the broader economy, would help quality stocks and also sectors which enjoy specific advantages in the light
of the current economic conditions.


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