The RBI Governor reiterated a ‘soft bias’ in line with previous Policies announced. The Policy preference continued to point towards provision of adequate liquidity to meet credit growth and support investment demand coupled with a softer interest rate structure. The knee-jerk response by the market is a short-term phenomenon due to a disappointment of not getting a larger cut in the CRR. Key to note in the Policy pronouncements is the fact that the RBI intends to use its easing measures to ensure the continuity of the yield curve at current levels. We expect the Bank Rate to be lowered to 6 per cent in the first half of fiscal.
The proposed measures pertaining to the call market will facilitate the development of a term-money market as well as a Repos market. There will be more pressure on lenders to lend in the term money market due to the new guidelines and should lead to a reduction in call volatility. What is important though, is that before RBI reduces number of players in the call money market, they should ensure that the Repos market is developed, and same day buy/sell is permitted.
The Policy has given a major thrust to securitisation of MBS (Mortgage Backed Securities) products, by reducing the risk weightage on investments made in MBS to 50 per cent as against 100 per cent for the purpose of capital adequacy and also these investments will be permitted for inclusion in the prescribed housing finance allocation of 3 per cent.
Further measures announced to develop the Government securities market like the introduction of the real time gross settlement system in another step in harnessing technology to develop the debt markets.
Another concern raised by the RBI is that the benefits of lower interest rates were not percolating to the corporate sector. RBI also highlighted the disparities in the interest rate structure and sought to reduce spreads between different interest rates.
Flexible deposit rates will facilitate lower lending rates and help reduce the cost of funds for banks.
They have also stressed on the need to keep bands over PLR as they found that some banks had large spreads over their PLRs. Overall, the Policy is a continuation of the growth map charted for the Indian financial markets.