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RBI Holds Rates, Ups Realty Provisioning

The Reserve Bank of India raised SLR, kept key rates unchanged, but delivered a heavy-handed warning on commercial real estate

The Reserve Bank of India (RBI) on Tuesday left key rates and ratios like repo, reverse repo and cash reserve ratio (CRR) unchanged. However, the central bank raised statutory liquidity ratio (SLR), the portion of deposits that banks are required to keep in government securities, by 100 basis points to 25 per cent at its second quarter monetary policy review.

The Bank left the repo rate unchanged at 4.75 per cent, while the reverse repo rate was retained at 3.25 percent and the CRR remained 5 percent.

However, the central bank delivered a stern warning to the real estate sector by jacking up provisioning requirements for loans to commercial real estate from 0.4 per cent to 1 percent. The statement said that, "In view of large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets (NPAs). "

This is a sharply-worded rebuke to the widespread restructuring of commercial real estate loans, which has basically boiled down to rescheduling of loans which would otherwise have become NPAs. Realty stocks crashed in response to the Bank's statement. The BSE's realty index was down about 7 percent at 1 p.m.

The decision to raise SLR, in the second quarterly review of the credit policy, is aimed at reducing liquidity and fighting inflationary expectations, which has started building up, especially in the case of food items.

The 6.90 percent 2019 government bond yield at 7.25 percent was down 10 basis points from 7.35 percent below Monday's close of 7.41 percent after the quarterly review.

The 30-share BSE Sensex was down 1.67 per cent at 16,460.89 points and the 50-share NSE index was down 1 percent at 4,913 points, paring losses immediately after the central bank's quarterly review. BSE Realty Index lost over 5 percent immediately after the policy announcement.