RBI's liquidity measures are accommodative yet mindful of normalisation: Lakshmi Iyer of Kotak Mahindra AMC

On May 5, the Reserve Bank of India (RBI) announced a set of measures to offset potential pain from the second wave of COVID and indicated it remains open to providing further relaxations depending on how the virus situation pans out in the country.

They acknowledged the efficacy of G-SAP (government security acquisition program) and announced a top-up of Rs 35,000 crore under G-SAP 1.0 to be conducted on May 20. This would achieve the dual objective of keeping bond yields in check and ensure a smooth passage of the government borrowing program.

Various other key measures relating to liquidity were announced to ensure the disruption is limited. An on-tap liquidity facility of Rs 50,000 crore with tenor of upto 3 years at repo rate is one such measure. Under this scheme, banks can extend fresh lending support to various borrowers which have been impacted by the pandemic (medical/pharma companies, logistics companies, individual/patients etc.), SLTROs-special long term repo operations for SFBs (Small finance banks) of Rs 10,000 crore was also announced, wherein, SFBs can provide further support of upto Rs 10 per borrower to small business units and micro units.

To enable State governments to better manage their cashflows, the tenor of OD (overdraft) facility also was enhanced. This is a good move as State governments can manage their market borrowings better without much disturbance to their cost of borrowing. The above measures (and more if needed) clearly suggest RBI's accommodative yet mindful stance of normalisation (CRR phased hike wasn't rolled back). The Governor reiterated that RBI stands ready to act swiftly if needed. Combination of G-SAP, OMOs / OTs will keep the yield curve anchored at current levels. Choice of security in G-SAP may lead select stocks to outperform. The benchmark 10-year government bond could breach 6 percent on the lower side, but largely tight ranges will remain as auction supply are a weekly affair too.