RBI keeps rates unchanged, invites retail investors directly in gilts

The Reserve Bank of India (RBI) on Friday kept its policy rates unchanged, assured an 'accommodative' stance for as long as necessary and ample liquidity for the bond market, but what is being touted as a game-changer, the central bank proposed to give retail investors direct access to the government bond market.

After the policy, repo rate (at which RBI lends to the banks) stands at 4 per cent, reverse repo rate (at which it takes money from banks) at 3.35 per cent, but the cash reserve ratio (CRR), or the amount of cash that banks required to maintain with the RBI at zero interest will be scaled back to 4 per cent in two phases. Effective March 27, it will be raised to 3.5 per cent from 3 per cent now, and from May 22, the CRR will be normalised back to 4 per cent. The CRR was reduced by 1 percentage points last year in view of the Covid crisis, and was due to be rolled back in March this year.

Retail Direct

The monetary policy was on expected lines, but the announcement on retail participation in the government securities market was not. RBI governor Shaktikanta Das termed it as a “major structural reform.” Experts couldn’t agree more.

“Allowing retail participation in the G-Sec market is a bold step towards the financialisation of a vast pool of domestic savings and could be a game-changer,” said State Bank of India chairman Dinesh Khara.

“This is a big reform in our view, but the uptake may only be gradual,” said Pranjul Bhandari, chief India economist of HSBC.

The move to allow investment through the portal ‘Retail Direct’ was a “path breaking reform”, said Indian Banks’ Association (IBA) chairman and Union Bank of India MD and CEO Rajkiran Rai G. “However, the retail customers need to be educated on the nuances of the government securities market. For this more awareness is to be created,” Rai said.

The RBI will soon release the modalities of how retail investors can directly participate in the primary and secondary market trades through RBI’s e-Kuber system. So far, retail participation was done through banks or gilt funds. The response was tepid,but the ease of investment now can eliminate the need for investing in a plethora of products, experts said. Money can move from all sorts of assets, including from real estate, where the rental yields are just 1-2 per cent in India. Bonds issued by the sovereign are the safest, which also can offer returns of 6 per cent and more and can substitute the need for saving in bank fixed deposits and fixed income mutual funds products. In case of short-term funds, government treasury bills can give more return than banks.

The governor tried to allay fears of a substitution effect on bank deposits and mutual fund products. “As the GDP grows and the size of the economy grows, the total volume of savings and deposits will naturally expand. Banks have so many other functions and services which they render. So, we feel that it will not undermine the flow of deposits to banks or mutual funds. It is one more avenue that has been made available," said the governor to a Business Standard query.

The retail focus can also eventually shift to the corporate bond market and the debt market in India can become as popular as the equities, experts say. In developed markets, bond markets have larger volume than equities. By bringing retail investors directly to the government, the RBI also widened the investor base and made it easier for the government to borrow.

According to RBI governor Das, this is the first such measure in Asia. Globally very few countries, such as the US and Brazil, allow retail investors direct participation in the government bond market.

Growth-inflation

For now, the six-member monetary policy committee’s (MPC) focus is on reviving growth. The decision on rates and stance was unanimous, the governor said. Given that inflation has returned within the tolerance band, “the MPC judged that the need of the hour is to continue to support growth, assuage the impact of Covid-19 and return the economy to a higher growth trajectory,” he said.

The RBI projected real gross domestic product (GDP) growth at 10.5 per cent in 2021-22 – in the range of 26.2 to 8.3 per cent in the first half and 6 per cent in the third quarter. Inflation was projected at 5.2 per cent for the fourth quarter of 2020-21, 5.2-5 per cent in the first half of 2021-22 and 4.3 per cent for the third quarter of 2021-22, “with risks broadly balanced.”

“The RBI’s upbeat views on the economy along with sustained cost-push pressures on inflation fortifies our stance of no rate cuts in the foreseeable future, notwithstanding sustenance of an accommodative stance,” said Tirthankar Patnaik, chief economist of National Stock Exchange.

In a rare departure, the RBI governor also indirectly told the state and the central government to keep prices, especially that of fuel, into check.

“Petroleum product prices have reached historic highs as international crude prices surged in recent months and the high indirect taxes remain, both in the centre and states," the governor said, adding the sharp increase in raw material prices have also added to the manufacturing cost. Therefore, a “concerted policy action by both centre and states, is critical to ensure that the ongoing cost build-up does not escalate further.”

The government would be reviewing the inflation target mandate of the RBI in March this year, the central bank said.

Liquidity and bond market

The bond market, though, was a little upset that no concrete measures on liquidity was announced to ease off pain of the market. The government in the Budget announced Rs 12 trillion of borrowing for the next fiscal and Rs 80,000 crore extra this year. The yields shot up 6 basis points after the policy, but closed at 6.13 per cent against Thursday's 6.10 per cent.

Without spelling out concrete measures, the RBI said it stood “committed to ensure the availability of ample liquidity in the system and thereby foster congenial financial conditions for the recovery to gain traction.”

However, the RBI did extend some relaxations to banks to enable them to invest more in government bonds. The enhanced held-to-maturity limit of 22 per cent, from the usual 19.5 per cent, done last year,was extended till March 31, 2023 to include securities acquired between April 1, 2021 and March 31, 2022. Banks can now deduct credit disbursed to fresh MSME borrowers from their net demand and time liabilities for calculating CRR, in case of lending up to Rs 25 lakh per borrower. It deferred the implementation of the last tranche of the capital conservation buffer (CCB) of 0.625 per cent to let banks enjoy more capital.

Banks can also now use the funds raised through on-tap targeted long-term repo operations (TLTRO) to lend to non-banking financial companies (NBFC).

The RBI said it will have a comprehensive review of the microfinance sector. According to Chandra Shekhar Ghosh, managing director and CEO of Bandhan Bank, it was more than a decade that the Malegam committee reviewed the framework for MFIs. Since then, the sector has grown substantially. Therefore, “A fresh and comprehensive review of the sector will certainly be a timely and relevant initiative towards harmonizing the regulatory framework for the industry for various kinds of entities that can be followed uniformly across the country,” Ghosh said.