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MPC uses non-interest tools to set a fine example of being dovish without cutting rates: Experts

The RBI shows readiness to undertake further measures as necessary to assure market participants of access to liquidity and easy financing conditions.

October 09, 2020 / 07:22 PM IST

On expected lines, the Reserve Bank of India (RBI) on October 9, maintained a status quo on key lending rates and kept its policy stance 'accommodative’.

It sees the end of economic contraction in Q4FY21 as green shoots are visible now following PMI data.

"The modest recovery in various high-frequency indicators in September 2020 could strengthen further in the second half of 2020-21 with progressive unlocking of economic activity. For the year 2020-21 as a whole real, GDP is expected to decline by 9.5 percent, with risks tilted to the downside, but if the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible," said RBI Governor Shaktikanta Das in a policy statement.

The expected GDP contraction for FY21 at 9.50 percent is also quite close to most of the market estimates, with the Q4 number most likely turning positive number, Joseph Thomas, Head of Research - Emkay Wealth Management told Moneycontrol.

The RBI shows readiness to undertake further measures as necessary to assure market participants of access to liquidity and easy financing conditions.


To provide impetus towards reviving the economy, RBI used several non-interest tools by announcing additional measures which are intended to enhance liquidity support for financial markets, to boost real estate sector, provide a boost to exports, and deepen financial inclusion and facilitate ease of doing business by upgrading payment system services.

To boost liquidity, the RBI has decided to conduct on tap Targeted Long Term Repo Operations (TLTRO) with tenors of up to three years for a total amount of up to Rs 1,00,000 crore and to extend the dispensation of the enhanced held to maturity (HTM) limit of 22 percent (which was increased on September 1 this year) up to March 2022, and to conduct Open Market Operations (OMOs) in State Development Loans (SDLs) as a special case. It is going to conduct OMO of Rs 20,000 crore soon.

On the regulatory front, the central bank has decided to rationalise the risk weights and link them to loan to value (LTV) ratios only for all new housing loans sanctioned up to March 2022, which is expected to give a fillip to the real estate sector.

Hence, experts feel this is a dovish policy statement.

"Rationalisation of risk weightage of home finance companies is an innovative initiative which will bring home loan rates down. This will be a boost to the real estate sector & housing companies. Proposed OMOs for state development loans will boost liquidity for SDLs. This will be beneficial for funds starved states," V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services told Moneycontrol.

"The new MPC's first policy announcement is a fine example of being dovish without cutting rates. The positive response of the bond market with a sharp cut in yields is a reflection of the success of the policy," he said.

Abhimanyu Sofat, Head of Research, IIFL Securities also feels despite not cutting benchmark interest rate, RBI has announced a significantly dovish monetary policy will slew of measures.

The RBI also reviewed the co-origination model and decided to extend the scheme to all NBFCs, including HFCs, in respect of all eligible priority sector loans, and allow greater operational flexibility to the lending institutions.

"This 'Co-Lending Model' is expected to leverage the comparative advantages of banks and NBFCs in a collaborative effort, and improve the flow of credit to the unserved and underserved sectors of the economy, Shaktikanta Das said.

In 2018, the RBI put in place a framework for co-origination of loans by banks and a category of Non Banking Financial Companies (NBFCs) for lending to the priority sector, subject to certain conditions.

Housing finance companies including HDFC, PNB Housing Finance, LIC Housing Finance, GIC Housing Finance, Can Fin Homes, Indiabulls Housing Finance and AAVAS Financier rallied 2-9 percent after rationalisation of risk weights on individual housing loans, which are now linked only to loan-to-value ratio (LTV), for all new housing loans sanctioned till March 2022.

The Bank Nifty and Financial Services indices were leading gainers today, after these RBI measures, with over 2 percent gains each.

Investors can increase their allocation to the BFSI space as we see more availability of money at lower cost to help in a strong rebound in the sector, Sofat advised.

The reason behind keeping policy rates unchanged is the higher retail inflation which was at 6.69 percent in August which is above the RBI's target of 4 percent (+/-2 percent).

"RBI is expecting a significant fall in inflation in H2 which has been higher due to supply chain challenges to justify its dovish stance," Sofat said.

Harshad Chetanwala at told Moneycontrol that historically the interest rates in India have not remained low for long.

"However, with limited visibility of economic recovery and as a lot of sectors continue to remain fragile, RBI continues to support growth and kept key rates unchanged. RBI continues to tolerate low-interest rates despite high inflation, indicating that an increase in interest rate will be slow and gradual pace until the pace of recovery improves," he said.

Here is what other experts say about RBI Policy:

Mohit Ralhan, Managing Partner & CIO, TIW Private Equity

RBI's decision to keep policy rates unchanged was on expected lines. The increase in inflation coupled with growth challenges due to COVID-19 pandemic has led RBI to adopt a wait and watch policy on the policy rate front and continue with the accommodative policy stance. There is no concern about the liquidity in the system right now. The easing of contraction in the Indian economy from here on will be critical to keeping the GDP decline below 9.5 percent. COVID-19 recoveries have been increasing and the pandemic situation is expected to be under much better control by the end of 2020. The rural economy is likely to lead the recovery supported by a good monsoon and high crop production. The current period needs to be navigated carefully and RBI's policy stance reflects the same.

Amar Ambani, Senior President & Institutional Research Head at YES Securities

RBI's status quo on rates was along expected lines given the elevated inflation. But the MPC clearly delivered accommodative moves through non-interest rate tools. As an endeavour to lower the yields in bond markets, the central bank announced to expand weekly OMO purchases, include State Development Loans as part of its purchases and TLTRO of Rs 1 trillion. We believe, over time, G-Sec 10-year yield will drop closer to 5 percent. Rationalisation of risk weights on Individual housing loans, now linked only to LTVs, for all new HL sanctioned till March 2022, is a positive for banks. But HFCs not mentioned may be a near-term dampener for housing finance stocks.

Sameer Kaul, MD & CEO, TrustPlutus Wealth Managers (India)

While rates have been left unchanged the RBI has announced several measures to increase liquidity and credit flow in the economy. The weekly OMO limit has been increased to Rs 20,000 crore. The RBI is also going to conduct OMOs in State Development Loans (SDLs) for the first time to rationalize the SDL spreads over G-Sec yields. An on tap TLTRO with a tenure up to 3 years for an amount of Rs 1 lakh crore. has been announced. The increased HTM cap of 22 percent for SLR holdings of banks has been extended to 31st March 2022.

In order to ensure higher credit growth even to the individuals and small businesses (i.e. with turnover of up to Rs 50 crore), the limit for maximum aggregated retail exposure to one counterparty has been increased from Rs 5 crore to Rs 7.5 crore . The RBI has also decided to rationalize risk weights of new housing loans till 31st March 2022, a move that is likely to help reduce home loan rates.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

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Sunil Shankar Matkar
first published: Oct 9, 2020 01:14 pm
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