by Vipul Jain – Knowledge Desk.
The Reserve Bank of India (RBI) held its first Monetary Policy Committee (MPC) meeting of the year on February 5, 2021, in which key decisions were taken. Here, we explain in short how that would impact the retail investor.
Repo Rate & Reverse Repo Rate – Unchanged
The Repo Rate and Reverse Repo rates were kept unchanged at 4% & 3.35% respectively. This was done reiterating that the RBI stance remains “Accommodative”.
How it impacts investors & markets: This brings good news for loan buyers and corporates, as lower loan interest rates would continue and thus support growth in the economy. It is good for the auto and real estate sectors.
Retail Investors Can Open Gilt Accounts: RBI Direct
As per the MPC 2021 review, retail investors can now directly invest in GILT (Government Securities) and participate in the primary & secondary bond market, under the digital initiative RBI Direct.
How it impacts investors & markets: This can be seen as a completely new product thrown open to retail investors. Currently only institutions could directly invest, so any retail investor had to route through Gilt Funds. This would attract many investors who had not ventured into this earlier. While the details of the set-up and structure are still awaited, gilts are highly rate-sensitive, so retail investors should consider the risk factors and seek professional advice before jumping in. This would enable the government and the central bank to increase retail participation, and more money would trickle into bonds.
Banks to Provide Funds to NBFCs under TLTRO
RBI has proposed to provide funds to NBFCs from banks under the Targeted Long Term Repo Operations (TLTRO).
How it impacts investors & markets: This is a very important development, as NBFCs are the main source of finance to the automobile and real estate sectors. It is a very welcome move and Finogent Advisory LLP strongly believes it will be a long-term contributing factor to the growth of the Indian economy. The auto sector reacted positively and many scrips gained on the announcement.
Restoration of CRR Starting March 2021
RBI has announced that banks have to revert to the original Cash Reserve Ratio (CRR) in two phases – to 3.5% of Net Time & Demand Liabilities (NDTL) by March 2021 and 4% by May 2021.
How it impacts investors & markets: This would impact the banks’ cash at hand, as they have to put aside funds to maintain it. In the short term stock prices may see some stress, but nothing of much concern, as the banking segment is flush with funds at this time.
New Digital Currency – Coming Soon
RBI plans to come out with its own digital currency, and a bill is expected to be passed banning all private cryptocurrencies.
How it impacts investors & markets: While nothing can be said until the bill comes with the fine print, many retail and HNI investors could be staring at the wiping off of their current holdings if the government does not provide an option to redeem or convert them to an Indian digital currency, albeit with taxation and scrutiny within Anti Money Laundering (AML) guidelines.
Outlook
Over the short term, in the fixed income segment short-term funds are more attractive. Investors should not get into playing duration. Inflation is inching towards the higher end of the spectrum, and we expect a rate hike if inflation is not controlled. That would have an impact on clients’ portfolios.