The RBI said it will restore the cash-reserve ratio to its normal levels in two phases, 3.5 per cent (from 3 per cent now) effective March 27, and then to 4 per cent from May
The Reserve Bank of India (RBI) kept its policy repo rate unchanged at 4 per cent and reverse repo rate at 3.35 per cent, and promised an accommodative stance as long as necessary to revive growth and come out of the Covid-19 induced stress.
The central bank said it will restore the cash-reserve ratio (CRR) to its normal levels in two phases, 3.5 per cent (from 3 per cent now) effective March 27, and then at 4 per cent from May. This would mean banks will again have to set aside money with the central bank. The special relaxation of 100 basis points was made to tide over the Covid induced stress situation last year.
There was ample assurance about comfortable liquidity in the speech, but no concrete measures spelt out. Some sections of the market were expecting an announcement of the open market operations (OMO) calendar that would spell out how much of bonds the central bank would buy from the secondary market to accommodate the borrowing programme. That did not happen.
And so, the announcement pushed up the 10-year bond yields by 6 basis points to 6.16 per cent at 10.45 AM.
The RBI governor said the gross domestic product will rise 10.5 per cent in 2021-22. He said that inflation should be at 5.2 per cent for the current quarter, and 5.2-5 per cent for the first half of the next fiscaland that this would be within the limit of RBI’s policy mandate of keeping the consumer price index (CPI) inflation within 2-6 per cent.
In a major reform that will have a huge ramification in the coming days for India’s bond market and the savings habit of the nation, retail investors can now open gilt accounts with the RBI and trade in government bonds. The retail investors can take positions both in primary and secondary markets, RBI governor Shaktikanta Das said in his speech.
This is a game changer as far as retail participation in the bond market is concerned. Major efforts in the past failed to persuade retail investors to take positions in the government debt papers. They could do it via banks, and mutual funds, or through various indices.
However, if the gilt accounts are opened with the RBI and positions are taken directly in the market, retail investors will flock to the route, something that bond market experts have been suggesting for a long time.
This will not only help the government borrow Rs 12 trillion easily, as the investor base expands hugely, it will also channelise retail investors’ money to fixed income guaranteed by the sovereign and facilitated by the RBI and expand the savings base in the country.
The fixed deposit products of banks, however, could be affected as people can directly invest their money in G-secs that offer similar or even better returns sometimes.
The details of the scheme are yet to be known.