9 October 2020
E
CO
S
COPE
The Economy Observer
RBI to buy State government securities...
…while keeping policy interest rates unchanged
In line with our expectations, the Monetary Policy Committee (MPC), along with its three newly elected external
members, has kept the policy repo rate unchanged at 4%. The reverse repo rate and Bank rate too stands unchanged at
3.35% and 4.25%, respectively. The decision to keep the policy rates unchanged and continue with the accommodative
stance was taken unanimously. However, the decision to keep the accommodative stance
at least during the current
financial year and into the next financial year
was taken with 5-1 majority (Prof. Jayanth R. Varma was against this
formulation).
For the first time since Mar’20, the RBI shared its macroeconomic forecasts. The MPC expects inflation to remain above
the 4% target by 1QFY22. CPI inflation is projected at 6.8% in 2QFY21, which should ease to 4.3% by 1QFY22 with
balanced risks. On the growth front, the MPC expects real GDP to contract 9.5% YoY in FY21, closer to the market
consensus but worse-than-our
expectations,
with risks tilted on the downside.
The highlight of the monetary policy, however, was the announcement to conduct Open Market Operations (OMOs) in
State Development Loans (SDLs) to improve liquidity and facilitate efficient pricing. While the news is highly welcomed
by the bond market, the quantum/calendar of these OMOs has not been disclosed yet. This is a positive step toward
helping the states reduce their cost of borrowing at a time when their revenues are already very
low.
Additionally, measures such as on-tap Targeted Long-Term Repo Operations (TLTROs), extension of held-to-maturity
(HTM) category within the Statutory Liquidity Ratio (SLR) from 19.5% to 22% of NDTL up to end-Mar’22, wider exposure
limits for retail loans and allowing banks to link their new housing loans only to Loan-to-Value (LTV) ratio (and not with
the size of the loan), are all steps that would provide incremental support to severely affected sectors of the economy.
Further, the RBI also announced OMO purchase of central government securities worth INR200b next week.
Overall, while details of OMOs in SDLs and specific sectors, which will benefit due to TLTROs would be keenly watched,
we believe that the string of policy decisions taken on 9 Oct’20 were more than what the markets were expecting.
Finally, we believe that India’s real GDP will surprise on the upside, while the headline inflation will remain above 4.5%
in the foreseeable future. Accordingly, we don’t expect any rate actions over the next few quarters. However, as the RBI
has showed us, the monetary policy is much more than interest rates and this is likely to be the case going forward as
well.
th
I. Repo rate kept unchanged and ‘accommodative’ stance maintained
Repo rate stands at 4%...:
In line with
our expectations, the MPC kept policy
repo rate unchanged at 4%. The reverse repo rate and Bank rate too stands
unchanged at 3.35% and 4.25%, respectively. The decision to keep policy rates
unchanged and continue with the accommodative stance was taken
unanimously. However, the decision to keep the accommodative stance
at least
during the current financial year and into the next financial year
was taken with
5-1 majority (Prof. Jayanth R. Varma was against this formulation)
(Exhibit 1)
…as priority remains sluggish growth:
For the first time since Mar’20, the RBI
shared its macroeconomic forecasts. The MPC expects inflation to remain above
the 4% target by 1QFY22. CPI inflation is projected at 6.8% in 2QFY21, which
should ease to 4.3% by 1QFY22 with balanced risks. On the growth front, the
MPC expects real GDP to contract 9.5% YoY in FY21, closer to the market
consensus but worse-than-our
expectations,
with risks tilted on the downside.
(Exhibit 3).
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com)
Yaswi Agarwal
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Other important measures announced by the RBI:
More than the decision on
policy rates, the MPC narrowed down on a numbers of other decisions, which in
our view may turn out to be very effective going forward. A snapshot of these
measures are as follow:
The highlight of the monetary policy, however, was the announcement to
conduct OMOs in state government securities, called SDLs, to improve
liquidity and facilitate efficient pricing. While the news is highly welcomed
by the bond market, the quantum/calendar of these OMOs has not been
disclosed yet.
This is a positive step toward helping the states reduce their
cost of borrowing at a time when their revenues are already very
low.
The RBI will conduct on tap TLTROs with tenors of up to three years for a
total amount of up to INR1t at a floating rate linked to the policy repo rate
(currently 4%). The scheme will be available up to end-Mar’21 and will be
flexible with regards to enhancement of the amount and period after review
of the response to the scheme. Such loans, once availed by the banks, have
to be deployed by them either in corporate bonds, commercial papers and
non-convertible debentures issued by entities in specific sectors (not
specified by the RBI).
We believe such availability of loans to severely
affected sectors is a positive step. However, it is not a new measure and is
likely to have only incremental benefit.
st
In respect of the SLR securities acquired on or after 1 Sep’20, the RBI had
increased limits under the HTM category from 19.5% to 22% of Net Demand
and Time Liabilities, up to end-Mar’21. It has now been extended up to end-
Mar’22 after which the limit will be brought back to 19.5% in a phased
manner.
In order to increase credit flow to individuals and small business segments
(with turnover of up to INR500m), the exposure limit of retail loans have
been revised upwards from erstwhile INR50m to INR75m.
To largely aid the real estate sector from the perils of COVID-19, the RBI has
allowed banks to link their risk weights of new housing loans (up to end-
Mar’22) only to the LTV ratio (and not with the size of loan). Such loans will
attract a risk weight of 35% where LTV is <= 80%, and a risk weight of 50%
where LTV is => 80% but less than or equal to 90%.
Lastly, the RBI has announced OMO purchase of central government
securities worth INR200b next week on 15
th
Oct’20.
OMO’s calendar/quantum to drive bond markets:
Overall, while the details of
OMOs in SDLs and specific sectors, which will benefit due to TLTROs would be
keenly watched, we believe that the string of policy decisions taken on 9
th
Oct’20 were more than what the markets were expecting. Finally, we believe
that India’s real GDP will surprise on the upside, while the headline inflation will
remain above 4.5% in the foreseeable future. Accordingly, we don’t expect any
rate actions over the next few quarters. However, as the RBI has showed us, the
monetary policy is much more than interest rates and this is likely to be the case
going forward as well.
9 October 2020
2
 Motilal Oswal Financial Services
Exhibit 1: RBI has kept policy rates unchanged…
7
6
5
4
3
4.25
4.00
3.35
Exhibit 2: …and system liquidity still in ample surplus
3
1
(1)
(3)
(5)
(7)
(%)
Repo
Reverse repo
MSF
(% of NDTL)
Liquidity deficit
Updated as of 7 Oct’20
th
Source: RBI, MOFSL
Exhibit 3: Inflation is expected to retreat to ~4% in 1QFY22…
Exhibit 4: …and GDP might contract 9.5% YoY in FY21
Source: RBI, MOFSL
Exhibit 5: CPI inflation came in flat at 6.7% YoY in Aug’20…
9
7
5
3
1
Aug-16
Exhibit 6: …and GDP declined by nearly a quarter in 1QFY21
11.0
Real GDP growth (% YoY)
Headline CPI
(% YoY)
Core CPI*
6.7
5.4
1.0
-9.0
-19.0
-29.0
-23.9
Aug-17
Aug-18
Aug-19
Aug-20
Source: Central Statistics Office (CSO), MOFSL
* ‘Housing’, ‘Clothing and Footwear’ and ‘ Miscellaneous items’
9 October 2020
3
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NOTES
9 October 2020
4
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Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In
case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30
days take appropriate measures to make the recommendation consistent with the investment rating legend.
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9 October 2020
6