While the Reserve Bank of India’s monetary policy committee’s decision on the benchmark lending rate was along expected lines, the Governor Sanjay Malhotra announced three key measures that could lend support to the ailing domestic equity markets.
First, to expand the scope of capital market lending by banks, the RBI proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates. The Governor also proposed to enhance limits for lending by banks against shares from Rs 20 lakh to Rs 1 crore, while also raising the limits for IPO financing from Rs 10 lakh to Rs 25 lakh per person.
Further, the RBI may withdraw the framework introduced in 2016 that disincentivized lending by banks to specified borrowers (with credit limit from banking system of Rs10,000 crore and above).
“While the Large Exposure Framework put in place for banks addresses credit concentration risk to a particular entity or group at an individual bank-level, concentration risk at the banking system level, as and when considered necessary, will be managed through specific macroprudential tools,” said the Governor in his post-MPC speech.
As a result of the higher lending against shares, investors will be able to pledge more shares and borrow higher funds against their securities. As a result, it could result in more buying interest in the markets, noted experts.
This policy review has many significant measures beyond rate adjustments like review of ECL framework, capital market exposure limits for banks, large borrower exposure norms etc., which will potentially have significant impact on ease of doing business in financial services sector and deepen lending and capital market businesses, noted Mahendra Kumar Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers (India).
The move measures for the banking sector including framework for M&A financing and financing against listed debt securities to expand by domestic banks will accelerate access to capital markets for acquisition financing as well as investment in fixed income and corporate bonds, noted Vishal Goenka, Co-Founder of IndiaBonds.com.
In the Monetary Policy Committee meeting today, the RBI decided to keep the benchmark repo rate unchanged at 5.5 percent on October 1, second time in a row. The MPC also kept the stance unchanged to 'Neutral'.
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