The RBI move is likely to aid the fiscal efforts made by the government to boost economic revival.
The digital lending market is expected to grow from $110 billion in 2019 to $350 billion in 2023
While maintaining its ‘accommodative’ stance, the RBI again kept the policy rates unchanged in its first bi-monthly monetary policy for FY22 on Wednesday, which was on expected lines. The move is likely to aid the fiscal efforts made by the government to boost economic revival.
“We also welcome the announcements made by the Governor to boost financial inclusion and credit flow to the housing and MSME sectors,” said industry experts, commenting on the policy announcement.
For instance, the apex bank has made a slew of changes to the scope of payment systems in case of prepaid payment instruments (PPI) for which full KYC has been completed. The changes are aimed at increasing interoperability between full-KYC PPIs across bank and non-bank issuers.
“The RBI has now made interoperability mandatory for full-KYC PPIs and for all acceptance infrastructures. This means that providers will have to ensure that going forward, PPIs such as e-wallets, pre-paid cards, etc., and acceptance infrastructure such as PoS devices, ATMs, QR codes, bill-payment touch points, etc. are agnostic and any KYC-compliant PPI instrument can be used to make the payment using any payment infrastructure,” said Adhil Shetty, CEO, BankBazaar.com.
In addition, customers with full-KYC PPIs of non-bank PPI issuers can also now withdraw cash through ATMs and PoS terminals. Until now, this facility was available only to full-KYC PPIs issued by banks.
At the same time, users can now park up to Rs 2 lakh in their accounts, allowing them access to more funds. Taken together with the mandate for interoperability and cash withdrawal, it will mean more seamless services for customers and will be a strong incentive for migration to full-KYC PPIs.
With a view to encourage participation of non-banks across payment systems, the RBI has expanded the RBI-operated Centralised Payment Systems (CPSs) that facilitate NEFT and RTGS payments to include RBI-regulated payment system operators. Until now, NEFT and RTGS were limited to banks alone, and this move by the RBI opens up a secure online payments system to a large number of regulated entities.
“While these non-bank payment operators – which include PPIs, card issuers, etc., – will not be eligible for any liquidity facility from the RBI to facilitate settlement of their transactions via the CPSs, they will still be able to leverage the NEFT and RTGS infrastructure for fund transfer. This move can help them minimise settlement risk significantly and at the same time, give a big boost to online payments,” said Shetty.
Naveen Kukreja, CEO & Co-founder, Paisabazaar.com, said, “The enhancement of maximum balance of accounts maintained with payment banks from Rs 1 lakh to Rs 2 lakh per individual customer should help in deepening financial inclusion and address the growing banking needs of account holders of payment banks. The proposals to make full-KYC Prepaid Payment Instruments (PPIs) mandatorily interoperable, increase their maximum balance to Rs 2 lakh and allow cash withdrawals through these instruments will further deepen the adoption of digital payment systems, especially in the smaller urban and rural centres. These steps will also create a level playing field for bank and non-bank PPI issuers.”
Besides, the extension of special refinance facilities to NABARD, SIDBI and NHB for up to 1 year should support credit flow and growth in the rural economy, housing sector and MSMEs. Similarly, the decision to extend the Priority Sector Loan (PSL) classification to loans lent by banks to NBFCs for on-lending to agriculture, MSME and housing segments till September 30, 2021 should increase credit flow to these segments and thereby, nurture the nascent growth impulses in these segments.
Moreover, the first monetary policy of this financial year is also positive from a bond market sentiment perspective. “It will also help reduce some volatility in an environment where market views around the broader macro trends of growth and inflation are still evolving. The current steepness in the yield curve along with this RBI policy makes the risk return tradeoff attractive for most debt funds,” says Amit Triphati, CIO-Fixed Income, Nippon India Mutual Fund.
In fact, in today’s monetary policy the RBI Governor has pleasantly surprised bond market participants with proposed Government Securities Acquisition Program 1.0 (GSAP 1.0) which will purchase government securities worth Rs 1 trillion in Q1FY22.
According to Edelweiss Mutual Fund, a proper execution of this program will achieve the following twin objectives:
1. It will provide certainty to the bond market participants with regard to the RBI’s commitment of support to bond market in FY22. 2. It will also help reduce term premiums on the long-end.
Taken together, these two measures will likely result in flattening of the IGB yield curve with money market yields (up to 1Y) trending higher and long-end of the yield curve benefitting from the RBI’s GSAP 1.0 program. To that extent, this should help reduce term premiums in a gradual manner.
The second positive trigger for the bond market could potentially come from India’s entry into Emerging Market Bond Indices in FY22. This should help reverse continuous FPI outflows from the bond market since FY19 and help create an additional & sustained source of demand for IGBs in FY22 and beyond. This should also help reduce term premiums gradually.
What should investors do?
According to Edelweiss Mutual Fund, the RBI policy has reiterated its earlier view that investors should expect low single-digit return from the bond market in FY22 and will have to increase their average maturity in order to optimize their risk-adjusted returns. So, investors at the short-end (up to 2Y) will probably earn zero or negative real return (inflation-adjusted) in FY22, similar to FY21. Prudent investors should consider investing in high-quality bonds maturing in 5Y or higher through passively-managed target-maturity bond index funds as well as bond ETFs to benefit from diversification, transparency, simple & clear investment objectives and predictability of returns for hold-to-maturity investors.
“Based on hardening of yields in Jan & Feb 2021, a number of investors were concerned with regard to their existing or potential fresh investments in the bond market and wanted to adopt a wait-and-watch approach for higher yields. While our stance on this approach is well documented, today’s policy has reiterated our view that the worst is possibly behind us as far as movement in yields are concerned. Based on that, investors are requested to get invested at the earliest and not wait for an opportune time,” it says.