RBI Governor and Monetary Policy Committee (MPC) Chairman Shaktikanta Das have promised not only to keep liquidity in the market, but also announced measures to lower yields and make borrowing cheaper for the states.

These announcements, especially in the context of a second stimulus package that the market hopes the government will announce soon, could provide a much needed boost to the economy.

“The policy measures recognize the growth risk facing the economy and the imperative to provide liquidity for growth. Once inflation, which currently remains a disruption on the supply side, eases, the RBI should be willing to cut rates and we expect a base cut of at least 35 this fiscal year. The decision to keep rates stable would also help protect banks’ margins, as the majority of the loan portfolio is tied to repo or other floating benchmarks, ”said RK Gurumurthy, head of treasury at Lakshmi Vilas. Bank.

Here are the main takeaways from the outcome of the meeting with the RBI politician:


RBI announced TLTRO (Targeted Long Term Repo Transactions) trades worth Rs 1 lakh crore to ensure that there is a plethora of easy cash for businesses. Under this program, banks can borrow money from the RBI at a repo rate to purchase corporate bonds, commercial papers, and non-convertible bonds issued by companies in specific industries.

Why should I care? The pandemic has depleted the cash supply of many business organizations, to such an extent that they may default on their obligations and even shut down (which means job losses). The money supply at low rates will give them hope to stay afloat, which in turn will offer a chance to save jobs and keep operations going.

• OMOs for state governments

The RBI also announced that it will conduct open market operations (OMOs) under State Development Loans (SDLs), which will keep borrowing rates low for state governments. In OMOs, the RBI buys government securities in the market, which raises bond prices and, in turn, lowers interest rates.

Why should I care? With the decrease in GST collections, state governments have sought money to keep health and regular programs running. Additionally, state governments have borrowed money from the market at relatively higher rates, so they will benefit from OMO.

In its economic outlook, RBI said economic growth would return to positive territory by the fourth quarter of the current fiscal year. The central bank also said that the GDP contraction for FY21 will be 9.5%, which is lower than many agencies that forecast a double-digit decline.

Why should I care? India is the major economy most affected due to the pandemic as it has experienced a sharp contraction in GDP. Any contraction of the economy has a negative impact on all categories of people. Thus, hopes of a faster recovery should bode well for the nation.

• Bumper kharif crop seedlings

Amid all the sadness, RBI said plantings of the Kharif crops have already exceeded last year’s area as well as the normal seeded area, which means if all goes well there will be a record product.

Why should I care? A bumper harvest not only ensures food security, but also keeps the rural economy functioning. The rural economy has already proven itself during the pandemic as sales of tractors and fertilizers have increased. It was also the only sector that posted growth in the first quarter GDP report. Thus, it will provide an additional cushion to the economy.

In the September 2020 cycle of the RBI survey, households expect inflation to decline slightly over the next three months, indicating that supply chains are recovering. RBI projections indicate that inflation will move closer to target by Q4FY21.

Why should I care? Inflation is something that eats up your money. Relatively higher inflation also prevents the RBI from lowering policy rates further. So if inflation cools down, we can see further action from the central bank to support the economy.

Governor Das said market participants and the RBI share a common set of expectations, which, in turn, should lead to orderly market conditions. Assuring market players of access to liquidity and easy financing conditions, he promised to take further measures. He also assured that the borrowing program of the Center and the States for the remainder of FY21 will be completed in a non-disruptive manner without compromising price and financial stability.

Why should I care? Markets are already close to their pre-Covid levels thanks to hopes of recovery and continued support from central banks and government. The promise of increased support will keep the market vibrant, thus increasing investor wealth.

The central bank said in response to comments from market participants, the size of the auction has been increased to Rs 20,000 crore. Previously, RBI bought bonds mainly in installments of Rs 10,000 crore.

Why should I care? As explained earlier, the RBI’s purchase of bonds keeps yield under control, so as it buys more G-Sec, yields and corporate borrowing costs will fall further. Mutual fund investors should also rejoice, as lower returns mean higher net asset values ​​for their funds.

• Rationalization of risk in mortgage loans

The RBI said it has decided to rationalize risk weights and link them to the loan-to-value ratio for all new home loans sanctioned through March 31, 2022. This goes against the usual practice of risk weights. differentials depending on the size of the loan. as well as the loan-to-value ratio. “The rationalization of risk weights is positive for banks. But not to mention housing finance companies can be a short-term drag on housing finance actions, ”said Amar Ambani, senior president and head of institutional research, YES Securities.

Why should I care? The announcement will certainly encourage banks to lend more to individuals without feeling stress on their balance sheets, a real estate analyst said. RBI also believes that the measure should give a boost to the real estate sector, which is one of the biggest generators of jobs and economic activity.

In order to facilitate fast and transparent real-time payments for businesses and national institutions, it was decided to make the RTGS system available 24 hours a day from December 2020.

Why should I care? RTGS is primarily intended for large transactions. The 24/7 availability of the system means businesses and individuals won’t have to wait for banks to open to transfer large amounts. It will also facilitate innovations in the high-value payments ecosystem and promote the ease of doing business, RBI said.

To support growth, MPC said it would wait for inflationary pressures to ease. Most committee members are in favor of maintaining an accommodating position, at least during the current fiscal year and into the next fiscal year.

Why should I care? The reduction in key rate cuts affects all loans across the board. So, if the repo rates are lower, you will pay less interest on home loans, car loans, etc.