So, how RBI really fared in its ‘whatever it takes’ moment

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By B. PrasannaGroup Head – Global Markets, Sales, Trading and Research, ICICI BankThe RBI’s latest monetary policy came as a pleasant surprise to the financial market in its use of innovative tools for nurturing the fledgling growth recovery in the economy to address the broken link of credit availability and delivery due to crises in the NBFC sector, NPA resolution in the banking sector and the ongoing restructuring exercise among the PSU banks. The use of these tools is RBI’s way of directly addressing the “transmission” of rate cuts which has been effected hitherto.The first of these tools is the announcement of CRR exemption for incremental bank loans to certain segments that will lower delivery of credit costs to these sectors. Extension of the restructuring scheme on MSME loans and projects in the commercial real estate sector may release some capital for banks in the short term while allowing breathing space to such concerned sectors. We concur with RBI assessment that credit support to these sectors will have large multiplier effect on growth.Further, the announcement of a Long Term Repo Operation (LTRO) of 1 year and 3-year tenor up to a total amount of ?1 lakh crore at the policy repo rate is a path-breaking one. There was concern that “Operation Twist” may inadvertently steepen the front end of the yield curve and, thereby, hinder transmission at the short end of the bond curve. Such concern is now more than adequately addressed by the LTRO as frontend G-sec yields have fallen between 15-25 bps with collateral benefits to spread assets. We expect the spread of sovereign curve over repo to compress even more as we go along.Additionally, RBI through LTRO seems to be recalibrating its transmission strategy from liquidity neutral and market-linked pricing under “Operation Twist” to directly augmenting banking liquidity and its rate, unlike the Operation Twist or OMO, which was directed at all participants. We expect that depending upon the experience gathered in first tranche of ?1 lakh crore, RBI may consider another LTRO directly linked with incremental credit to specific sectors that might have a more pronounced nudge effect to lend with cheaper resources.Global central banks have used yield curve management tools only when conventional monetary policy space seemed limited. However in RBI’s case, the recent unconventional measures (Operation Twist, LTROs, macro-prudential easing) seem to be additional tools as MPC forward guidance of “policy space available” do suggest further accommodation in the policy rate.The latest liquidity framework adopted by RBI has abandoned the stance of liquidity to be kept in marginal deficit and has shifted the main liquidity management tool from the overnight repo to the 14-day term repo/reverse repo. This measure is likely to push banks to borrow/lend from each other instead of the RBI for daily liquidity management. It is also plausible this move will gravitate weighted average call rate in the direction of the policy corridor of MSF and reverse repo depending on the system liquidity balance. Also the removal of quantitative restrictions (earlier system liquidity around 1% of NDTL) does suggest that the size of OMO bond purchases and/ or Operation Twists will no longer be constrained by liquidity consideration. This should assist in further reduction of the term premia in the sovereign curve. Overall, the latest announcements and liquidity framework show RBI’s commitment towards accommodative stance. More steps like quantitative assessment of durable liquidity conditions and its publication on a fortnightly basis and periodic consultations with participants are welcome developments.RBI announced other measures like deepening of the rupee interest rate derivative market, which will encourage higher non-resident participation and enhance the role of domestic market makers in the offshore market. It will also improve transparency and achieve better regulatory oversight.In summary, there is no denying that at a time when fiscal and monetary policy space to boost the growth impulse is limited, the RBI has been able to maximise its support for growth through unconventional monetary policy measures which would improve both cost and availability of credit. Further, by keeping the policy stance as “accommodative” and forward guidance of “policy space available”, RBI has elegantly maintained the benign monetary policy environment. The “whatever it takes” approach and ability to experiment with unconventional monetary tools will go a long way to nurture recovery. As RBI Governor said, “You might discount the MPC outcome but don’t discount the RBI.” The hidden meaning in that statement is for everyone to see.

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