How RBI’s October monetary policy review will impact borrowers, investors

As widely expected, the Reserve Bank of India (RBI) kept the repo rate unchanged at 4% in its October 2020 policy review, while maintaining an accommodative stance, but announced a series of confidence-boosting measures.

Industry experts said while there was no policy rate cuts in today’s Monetary Policy Review, steps were taken to ensure that lending continues to get easier and cheaper, especially to priority sectors such as real estate, in order to drive economic activity. Individuals and small businesses can now borrow bigger, and the steps taken are expected to keep the costs of borrowing low as well.

“Despite no rate cut, the policy is extremely dovish due to the liquidity and regulatory measures announced today. More specifically, we believe ‘on tap TLTRO’, OMOs in state development loans, extension of HTM limits till Mar ‘22, and rationalisation of risk weights on housing loans are very important measures and are likely to ease financial conditions further and provide support to key sectors of the economy,” said Anagha Deodhar, Economist, ICICI Securities.

Here are the key takeaways from the policy review that may impact borrowers and investors:

TRTRO To Spur Lending

This is a step aimed at providing banks access to credit at the repo rate for tenures up to three years. “The new TLTRO would allow banks to borrow at low costs and lend to corporates in specific sectors in order to stimulate liquidity, productivity and economic growth. While no repo rate cut was provided, this step would ensure that the banking systems will have adequate low-cost funds for lending,” says Adhil Shetty, CEO, BankBazaar.com.

Bigger Retail Loans

Retail and small business loans can now be up to Rs 7.5 crore from the earlier limit of Rs 5 crore. The new limit will apply to new loans as well as on incremental exposures on existing loans. This step will allow individuals and small businesses to take bigger loans for their ongoing needs.

Easier Risk Weightage Norms

This is another step that would ease lending norms. For every loan given, banks must set aside a percentage of the loan in order to maintain solvency. This is the risk weightage. The riskier the lending, the higher the weightage. The percentage was earlier decided by two factors: the size of the loan and the loan-to-value (LTV) ratio.

“The LTV in a home loan is the percentage the of the property cost the bank will finance while the rest needs to be financed by the buyer. After today’s decision, for home loans, the risk weightage will be done basis only LTV, and capped at 50% where the LTV is higher than 80%. The RBI expects this will free up more of the banks’ capital for real estate lending to spur growth,” informs Shetty.

Impact on Debt & Equity Investments

The RBI, expressing its intention of buying government bonds, announced a Rs 1 lakh crore TLTRO aimed at corporate debt. This would boost the bond market sentiment as reflected in a 10 basis point fall in the 10-year bond yield. The equity markets have also reacted positively with the announcements as seen in the uptick in key indices. That said, these announcements are aimed at easing ongoing economic challenges. Investors shouldn’t be guided by short-term thinking. Rather they should invest to a long-term plan that allows them to get the best out of both equity and debt investment options.

Impact on FDs

The RBI move will not bring much cheer to the FD investors who have been concerned about the prevailing low rates of bank deposits for a while now. However, at a time when capital protection has become as important as capital appreciation, risk-averse investors would be well-advised not to look away completely from deposits despite the low interest rates on offer.

“To maximise their FD returns, they may want to explore high-quality corporate debt as well as deposits with small finance banks where they may get up to 2.2% higher than the rates being offered by large banks. The key is to diversify and ladder the deposits in order to optimize risks, rewards and liquidity. Most importantly, investors should also explore other avenues like equity mutual funds and gold according to their returns expectations, risk-taking ability and liquidity requirements for higher returns or to provide additional stability to their portfolios,” suggests Shetty.