RBI focused on removal of accommodation
Policy rates were kept unchanged amidst severe forward risks to growth and inflation. (Repo=4.00%;Reverse Repo=3.35%).
Stance deemed accommodative with a focus on removal of accommodation if inflation pressures build further up (eg India’s Crude basket remains above USD 100 for more than 2-3 months).
In a major announcement though, RBI will now consider Standing Deposit Facility (SDF) as a floor in the Liquidity Adjustment Facility (instead of reverse repo). Consequently, SDF will replace reverse repo in pricing overnight call rates.
- Policy rates were kept unchanged amidst severe forward risks to growth and inflation. (Repo=4.00%;Reverse Repo=3.35%).
- Stance deemed accommodative with a focus on removal of accommodation if inflation pressures build further up (eg India’s Crude basket remains above USD 100 for more than 2-3 months).
- In a major announcement though, RBI will now consider Standing Deposit Facility (SDF) as a floor in the Liquidity Adjustment Facility (instead of reverse repo). Consequently, SDF will replace reverse repo in pricing overnight call rates.
What is SDF?
A concept tool identified by Urjit Patel Committee, acknowledged by RBI in 2017, and activated in 2022. This is comparable to reverse repo rate. It is a rate at which commercial banks can park excess funds with the RBI without RBI providing any collateral in return (unlike in reverse repo where RBI must provide collaterals in the form of GSecs).
What was announced today?
SDF will be the benchmark rate serving as floor of the Liquidity Adjustment Facility (LAF) , instead of Reverse Repo. SDF has been set at 3.75% while Reverse Repo is 3.35%. So effectively, RBI will pay a higher interest rate (40 bps higher) to banks willing to park excess cash, a measure to mop up excess liquidity. This can be construed as an indirect measure to communicate RBI’s intent to move away from its accommodative stance soon.
What will change?
Though the communicated policy stance is accommodative, this is an indirect hike in reverse repo, often considered as the first step towards normalisation of monetary policy. This will signal a definite rise in interest rates (though a moderate one) starting with bank deposit rates.
In preparation of an influx of government security (Gsec) papers as a part of Government’s FY23 borrowing plan, banks will be allowed to maintain equivalent of 23% (of Net Demand and Time Liabilities) in Held To Maturity (HTM) securities including newly acquired securities, till Mar’23. This additional fund availability with limited interest rate risk is expected to raise demand for new Gsecs and help keep yields low.
To boost home sales, banks will continue to rationalize risk weights on home loans by linking them only to loan to value ratios (and not quantum of loan) till Mar’31. This will further aid home loan offtake.
Market reaction immediately after policy:
- In preparation of an influx of government security (Gsec) papers as a part of Government’s FY23 borrowing plan, banks will be allowed to maintain equivalent of 23% (of Net Demand and Time Liabilities) in Held To Maturity (HTM) securities including newly acquired securities, till Mar’23. This additional fund availability with limited interest rate risk is expected to raise demand for new Gsecs and help keep yields low.
- To boost home sales, banks will continue to rationalize risk weights on home loans by linking them only to loan to value ratios (and not quantum of loan) till Mar’31. This will further aid home loan offtake.
- Market reaction immediately after policy:
| Closing (7 Apr) | Post Policy (11:30 AM IST) | |
|---|---|---|
| USDINR | 76.03 | 75.74 |
| 10 Yr GSEC%(benchmark) | 6.91 | 7.02 |
| O/N Call Rate% (wtd) | 3.24 | 3.58 |
| Nifty 50 | 17,639.55 | 17,630.80 |
| Closing (7 Apr) | Post Policy (11:30 AM IST) | |
|---|---|---|
| USDINR | 76.03 | 75.74 |
| 10 Yr GSEC%(benchmark) | 6.91 | 7.02 |
| O/N Call Rate% (wtd) | 3.24 | 3.58 |
| Nifty 50 | 17,639.55 | 17,630.80 |
We read today’s policy as a step-up towards a neutral and subsequently hawkish stance. We expect the Repo hike cycle to start in June’22 with a 25-40 bps rise, depending on the prevailing crude prices then (25 bps if Indian crude basket is less than USD 90, else 40 bps)
- We read today’s policy as a step-up towards a neutral and subsequently hawkish stance. We expect the Repo hike cycle to start in June’22 with a 25-40 bps rise, depending on the prevailing crude prices then (25 bps if Indian crude basket is less than USD 90, else 40 bps)
TruQuest is knowledge series launched by TruBoard Partners providing succinct updates and views on:
- Liquidity outlook
- India’s macro economic view
- Trends within the infrastructure, Real Estate and Renewable Energy sectors
- Impact analysis of new regulations and policies on lending and capital flow
Author: Debopam Chaudhuri, Head of Research and Ratings
+91-9819239926, dc@truboardpartners.com
Author: Debopam Chaudhuri
Head of Research and Ratings
+91-9819239926
dc@truboardpartners.com
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