The RBI on Monday announced a bunch of measures that will loosen the liquidity tap and tamp down on interest rates amid concerns over inflation and higher government borrowing. The apex bank, thus, is left to carry the can as the economy shrank by 23.9 per cent in the first half with no sign of an additional stimulus.

The central bank raised the held to maturity (HTM) limit by 2.5 per cent, announced another simultaneous purchase and sale of government bonds (Operation Twist) of Rs 20,000 crore and term repo operations of Rs 1 lakh crore.

Simultaneously, the RBI comforted market fears over rising inflation and prospects of an extended rate pause with indications of food and fuel prices stabilising and the moderations in the prices of inputs.

The measures to “foster orderly market conditions” come after yields on the benchmark 10-year security breached the 6 per cent mark. Last week, the central bank had announced a special open market operation involving the simultaneous purchase and sale of government securities to the tune of Rs 20,000 crore. The second tranche of this auction will be conducted on September 3.

Among the measures, the most “potent” related to HTM investments of banks. These are investments held till maturity. Since they are not marked to market (MTM), banks are not exposed to the possibility of treasury losses on these investments if bond yields move.

Banks are required to maintain 18 per cent of their deposits in SLR securities or government bonds with the investment in the HTM category limited to 25 per cent of the 18-per-cent limit. Banks can exceed this limit provided the extra sum is parked in SLR securities within an overall limit of 19.5 per cent of NDTL (net demand and time liabilities).

“It has been decided to allow banks to hold fresh acquisitions of SLR securities acquired from September 1, 2020 under HTM up to an overall limit of 22 per cent of NDTL up to March 31, 2021 which shall be reviewed thereafter,” the RBI said. Suyash Choudhary, head fixed income, of IDFC AMC, said this would give banks room to invest another Rs 3.6 lakh crore in the concerned SLR securities.

The RBI further said it will conduct term repo operations of Rs 100,000 crore at floating rates in mid-September to mitigate pressures on the market on account of advance tax outflows.

Besides banks may refinance their borrowings they had availed under long-term repo operations (LTROs).

Choudhary said banks can reduce cost of their earlier long term repos taken at 5.15 per cent with the current rate of 4 per cent.

The RBI will also conduct special open market operations involving the simultaneous purchase and sale of government securities (Opeartion Twist) worth Rs 20,000 crore in two tranches of Rs 10,000 crore each. The auctions would be conducted on September 10 and September 17.

The RBI further reiterated that it remains committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of COVID-19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability.

Its measures to `foster orderly market conditions’ comes after yields on the benchmark 10 year security breached the 6 per cent mark. Last week, the central bank had announced a special open market operation involving the simultaneous purchase and sale of Government securities to the tune of Rs 20,000 crore. The second tranche of this auction will be conducted on September 3.

The central bank today admitted that market sentiment has recently been impacted by concerns relating to the inflation outlook and the fiscal situation amid global developments that have firmed up yields abroad.

Among the three measures that it announced today, the most 'potent’ related to HTM investments of banks. These are investments that are held till maturity. Since they are not marked to market (MTM), banks are not exposed to the possibility of treasury losses on these investments if bond yields move.

Currently, banks are required to maintain 18 per cent of their deposits in SLR securities or Government bonds. The present limit for investments that can be held in HTM category is 25 per cent of this total investment. Banks are however, allowed to exceed this limit provided the excess is invested in SLR securities within an overall limit of 19.5 per cent of NDTL.

"It has been decided to allow banks to hold fresh acquisitions of SLR securities acquired from September 1, 2020 under HTM up to an overall limit of 22 per cent of NDTL up to March 31, 2021 which shall be reviewed thereafter’’, the RBI said today.

According to Suyash Choudhary, Head – Fixed Income, IDFC AMC, with the RBI allowing an additional 2.5 per cent of deposits for banks as HTM for the second half of the current financial year, allows an additional purchase capacity of approximately Rs 3.6 lakh crore for banks without worrying about fluctuation risks over this period.

RBI further said that it will conduct term repo operations of Rs 100,000 crore at floating rates in the mid-September to assuage pressures on the market on account of advance tax outflows. More importantly, it said that in order to reduce the cost of funds, banks may exercise this option to re-finance the funds that they had availed under long-term repo operations (LTROs).

Choudhary here added that banks have thus been allowed to reduce cost of their earlier long term repos (taken at 5.15 per cent) with the current rate (four per cent) through these operations.

The central bank added that it will conduct additional special open market operation involving the simultaneous purchase and sale of Government securities for an aggregate amount of Rs 20,000 crore in two tranches of Rs 10,000 crore each. These auctions would be conducted on September 10 and September 17.

To soothe the market concerns about elevated inflation, the RBI said that while the monetary policy committee (MPC) had earlier this month decided to pause and remain watchful and use the available space judiciously to support the revival of the economy, there are indications that food and fuel prices are stabilising and cost push factors are moderating.

"In addition, the recent appreciation of the rupee is working towards containing imported inflationary pressures. The RBI remains vigilant about these developments. In support of the accommodative stance of monetary policy, the RBI is committed to ensuring comfortable liquidity and financing conditions in the economy," it noted.