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

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Updated: Oct 09, 2020 4:19 PM

The 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.

Individuals and small businesses can now borrow bigger, and the steps taken are expected to keep the costs of borrowing low as well.

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. Till now, the risk weight of home loans was determined on the basis of loan amounts and LTV ratios. Higher loan amounts lead to higher risk weights, leading banks to set aside higher capital while sanctioning the loan. The latest MPC announcement regarding the home loan risk weights has done away with the requirement of factoring in loan amount while setting risk weights for fresh home loans sanctioned till March 31, 2022.

“Only LTV ratios will be considered while setting the risk weights of new home loans. All fresh home loans with LTV ratios of or less than 80% will attract risk weight of 35% whereas those with LTV ratios of above 80% to 90% will attract risk weight of 50%. This announcement will primarily benefit borrowers of high value home loans by reducing their home loan lending rates as banks will have to set aside a lesser amount of capital for such loans. This temporary step is primarily aimed at boosting demand for high value home purchases and will thereby boost growth in demand and employment in sectors closely linked with the housing industry,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

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.

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