The RBI kept financial markets happy by keeping key policy rates unchanged in its monetary policy on Tuesday. Deposit and lending rates, hence, will not see any significant change for now. But that’s not to say that the RBI did nothing at all.

By reducing the statutory liquidity requirement and funds provided under the export credit refinance (ECR) facility, the RBI has gone a step further to align interest rates across different segments to market-determined rates.

The objective — as stated in the Urjit Patel Committee report — is to facilitate the transmission of policy rates across segments. For borrowers this means quicker pass through of policy action on banks’ lending rates over the long term.

Let us look at SLR first. The total SLR requirement for banks has been reduced by 50 basis points to 22.5 per cent of deposits. This frees up close to ₹42,000 crore of banks’ funds.

This move will help in a couple of ways.

One, it will make additional funds available to banks, which will be useful as the investment cycle picks up. Two, this is expected to facilitate better transmission of policy rates to depositors or lenders.

Consider the objective of freeing up funds first. Most banks are currently investing 3-5 per cent more than the mandated SLR requirement.

This is due to lack of viable lending opportunities and the comfort of parking funds in highly safe assets, which can be used as collateral to borrow from the RBI.

The RBI’s move will not make banks release additional funds immediately. Over the last two years, deposit growth has been languishing in the 13-14 per cent range. So banks might want to hold on to the government securities as a buffer.

The excess government securities are likely to be sold only if there is notable pick up in viable lending opportunities. For now, the credit growth remains muted at 13.6 per cent.

Also, banks, which are the biggest buyers of government bonds (about 47 per cent share), would prefer to earn some treasury income through change in bond prices as the core lending business remains muted.

With expectations of a rate cut and possible bond price rally over the next year, banks’ appetite for government bonds is unlikely to wane.

What else would explain the marginal correction in yields of 10-year bonds on Tuesday? The yield on the 10-year G-sec came down by seven basis points to 8.59 per cent.

Market rates please The other objective of reducing the SLR — better transmission — is in line with the Urjit Patel Committee recommendation, which looks at the need to do away with a captive market for government securities, and realign the cost of borrowing to market determined rates.

In the past, there has been a ready market for bonds through buybacks from the RBI under open market operations as well as through the SLR mandate. This has kept rates on government borrowing suppressed.

From a longer term perspective, this, along with other measures such as providing overnight funds to banks at market-determined rates (term repo), will ensure that every segment of the yield curve moves to market-determined rates. This is expected to facilitate quicker transmission of policy action on banks’ lending rates.

Raw deal for exporters? Exporters are crying foul as the funds provided under the ECR facility has been reduced from 50 per cent of eligible export credit outstanding to 32 per cent.

Some market players feel this could lead to 0.5-1 per cent increase in borrowing costs for exporters.

But the RBI has opened a special term repo window to meet this shortfall.

This is again in line with the Urjit Patel Committee recommendation to remove sector-specific refinance facilities that interfere with monetary policy transmission. The idea is akin to that for government bonds — to provide liquidity at market-determined rates.