Monetary Policy comments on Introduction of Standing Deposit Facility, Individual Housing Loans and SLR Holdings in HTM category by Anil Gupta, ICRA

8 Apr 2022 , 06:37 PM

1)     Introduction of the Standing Deposit Facility
With 80% of surplus liquidity being absorbed under VRRR at rate closer to repo rate of 4.0%, the introduction of SDF at 3.75% will improve the returns on the balance liquidity that was being placed by banks at reverse repo rate of 3.35%. This could also lead to an increase in overnight call money rates and will be positive for profitability of banks. This will however also lead to a further increase in short-term rates such as T-bill and consequent increase in borrowing costs linked to such rates. We also expect banks to raise deposit rates in short-term buckets as they can park the liquidity so generated at better rates.

2)     Individual Housing Loans — Rationalization of Risk Weights
Supported by the competitive mortgage rates from lenders, the demand for home loans has been robust and though the property prices have been on an increasing trend. The continuation of relaxed risk weights on home loans reflects RBI’s view to support the housing market growth and the multiplier effect the housing market has.

3)     SLR Holdings in HTM category
Increase in HTM limits by 1% could create an additional headroom of Rs1.6-1.7 trillion for banks to hold the government securities without marking them to market in a rising bond yield scenario and thereby preventing any losses. This could improve the appetite of banks for government securities and facilitate the large borrowing programme of central and state governments while moderating the rising in yields. However given the overall size of the government borrowings, the absorption of the large supply could remain a challenge.

-  Anil Gupta, Vice President & Co-Group Head, ICRA.