RBI policy statement: Revisiting the saga of 'The Bold and The Beautiful'

The RBI policy statement on Friday reminds us of the famous saga, The Bold and the Beautiful.

The policy is bold as it rightfully acknowledges inflation as a major threat and the policy is beautiful as it is mindful of growth concerns and thus has ensured calibrated interventions to support a large government borrowing programme. The yields have spiked, but we believe the market may have not factored in the implications of the newly introduced Standing Deposit Facility (SDF).

The introduction of SDF, nearly eight years after the Patel committee had propagated an independent, transparent, non-collateralised concurrent offering, is a smart policy decision.

As lending to the central bank has no credit risk, there was no need in the first place to provide government securities (G-secs) as collateral when a market participant placed its funds with the RBI.

Interestingly, since the SDF comes with the conditionality of no collateral of G-secs to be given by the RBI to banks, it will free up securities from statutory liquidity ratio (SLR) holdings of banks. This will thus result in lowering of excess SLR holdings and will lead to an increase in demand for bonds.

Enhancing the held-to-maturity (HTM) limit under SLR category further should give banks enough time to manage their investment books as corporate demand was showing a revival before the war and should get a push as conditions normalise going ahead.

The SDF move will have a satiating impact on G-sec yields over the medium term. Of course, there will still be demand for reverse repo auctions for banks that are not holding large excess SLR to meet the regulatory dispensation. Since reverse repo is less remunerative, it might induce such banks to now strive for investment in G-secs. Thus, in both the cases — of banks holding large excess SLR and banks not so large with excess SLR — it will be a win-win for markets. Clearly, SDF will now be an added weapon for maintaining orderly financial conditions as the government borrowing programme will now also be a function of the liquidity corridor.

A late evening circular by the RBI has, however, clarified that deposits under SDF will now count as SLR. So effectively, “reverse repo’s new name is SDF”.

Over time, SDF (that is currently overnight) and VRRR (that is in multiples of fortnightly durations) may have a dynamic meeting ground. It may be noted that the RBI has been anchoring VRRR all through the turbulence, providing banks with better yields on floating deposits, while also signalling normalisation through alignment with market-determined rates.

Separately, the decision to continue with the existing dispensation of housing loans being linked to the loan to value ratio has helped banks in reducing capital requirement of around Rs 400 crore till FY22. Assuming 15 per cent growth in the housing loan portfolio in the next year, this will save capital requirement of Rs 500 crore till March 2023. This will help banks in ensuring a rational adjustment on mortgage rates.

The RBI has also proposed to allow interoperability in cardless cash withdrawal transactions at all banks and ATMs using the UPI facility.

Finally, market participants who are now factoring in large rate hikes need to understand that growth is also weak. The RBI is equally seized of giving growth a lift and hence the myriad of cacophony of such rate hikes seems to be utterly misplaced.

The author is Group Chief Economic Advisor, SBI. Views are personal