Key Highlights
Reserve Bank of India Governor Shaktikanta Das announced additional liquidity measures in a press briefing today, including a 25 basis point reduction in the reverse repo rate and an inflation outlook that “leaves room for policy action”.
Here are the other announcements:
- Undertaking TLTRO-2.0 for amount of Rs 50,000 crore to begin with in tranches of appropriate sizes.
- In respect of all accounts for which banks and financial institutions grant a moratorium, the 90-day NPA norm will exclude moratorium period.
- Asset classification standstill for all accounts where moratorium granted.
- Scheduled commercial banks and co-op banks will not make any further dividend payouts for profits from FY20 until further instructions.
- To provide special refinance facilities of Rs 50,000 crore to NABARD, SIDBI, NHB to address sectoral credit needs.
- LCR requirement for scheduled commercial banks is being brought down to 80 percent from 100 percent with immediate effect.
- Date for commencement of commercial operations, in NBFCs loans to commercial realty projects, can be extended by 1 year.
- Ways and means advances limit of states increased by 60 percent over and above limit as of March 31, 2020
M Govinda Rao On Increased WMA Limit
M Govinda Rao, Member of the 14th Finance Commission welcomed the RBI’s announcement on WMA, saying the increase in limit for states very important at this particular point of time.
- Will protect states from going in for long term borrowing immediately
- States are on the frontlines, spending on health care, migrant welfare etc.
- If all states borrowed from the market immediately, we could have seen a spike in yields
- Now states can phase out their borrowing needs & borrow at cheaper rates
- Will have to be seen if the WMA limit hike is adequate; will depend on how much states will have to spend on Covid-19 fight
- States' FRBM limit may need to be raised, over & above this temporary relief on the WMA limit
- Have to be careful about how much additional money supply that's injected into the system
Experts React To RBI's Measures
Keki Mistry, Vice Chairman & CEO, HDFC
- There are certain very good announcements particularly on the liquidity front
- Additional Rs 50,000 crore TLTRO 2.0 will infuse liquidity in the system
- Money provided to NABARD, SIDBI & NHB will ensure that NBFCs/HFCs get funding
- Reverse repo rate cut gives banks more incentives to lend money
- Larger NBFCs/HFCs were able to borrow under the LTRO window, smaller ones weren't
- TLTRO 2.0 will ensure that smaller NBFCs/HFCs also get funding & remain liquid
- Expect RBI's decision with respect to bank dividends to get reviewed in September
- Banking system shareholders are largely retail; not getting dividends will reduce their ability to spend
- Dividend decision designed to retain capital within the banks, but expect decision to be reviewed in September, if all goes well
- Ever since the last RBI announcements, some degree of liquidity has been flowing into the system
- Today's announcements will ensure that the smaller players will also get access to liquidity
Ramesh Iyer, MD, M&M Financial
- Most of the requests made by NBFCs over a period have been met
- Still waiting for clarity on the repayment moratorium from NBFCs to the banks
- Liquidity support has been made available; that's great news for NBFCs
- The liquidity injected via TLTRO 2.0 will be required to do business post May 3
- Moratorium was sought to help with repayments to banks; liquidity support could be a decent alternative
- Liquidity support will help NBFCs meet their commitments
Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services
- Bar on dividend payout gives the banking system additional funds to improve credit flow to the economy
- Additional time for NPA resolution to reduce banks' provisioning requirement
- Measures announced today interesting both quantitatively and for the instruments
- Risk aversion by banks can't be wished away, to some extent justified
- Would have liked a complete account of the transmission of earlier measures
- Sufficient liquidity is being made available; need to see how banks respond with respect to sanctioning to NBFCs
- NBFCs will have to hold dialogues with banks & convince them not to be risk averse in this situation
- Since opening balance is not going to be considered as NPA, that also releases pressure on the capital
Saugata Bhattacharya, Chief Economist, Axis Bank
- States' WMA limit hike key as markets will not be able to support the expected fiscal expansion from the states without serious consequences
- Hence, RBI as lender of last resort, has to support
- Expect the RBI to continue supporting the borrowing requirements of central and state governments
- Relaxation of liquidity coverage ratio for banks from 100 percent to 80 percent helps banks which were at the margins of the SLR
Dhananjay Sinha, Director, Systematix Group
- There's a continuity in the measures being announced by RBI
- RBI aggressively addressing issues in the NBFC space to prevent repeat of earlier problems
- RBI trying to reduce banks' risk aversion
- Relaxations for real estate important, since the sector employs a large number of people
- There's a risk of increase in NPAs after the 180-day period
- Expect cash flows to improve after the lockdown ends; sufficient gap after that to ensure that borrowers repay
Mrityunjay Mahapatra, MD & CEO, Syndicate Bank
- RBI has tried to balance the need for system liquidity & providing assistance to impacted businesses and the need to maintain banking system's health
- Banks have been asked provide additional 10 percent till a review is made
- Without the relaxation, 15 percent provision would've had to be made
- There's some relaxation, but it's not as if there's full relief
- Resolution timeline extension will also ease provisioning requirements
- Restriction on dividends won't have much impact on banks' balance sheets
- Disclosures of account details (standard, moratorium etc.) are market imperatives
- Overall incentives for lending has gone up
- Risk matrices of individual banks will play out differently
- Expect banks to expand risk appetite
Concluding Remarks
The press release of NSO on April 13 showed CPI declined by 70 basis point to 5.9 percent for March, Das highlighted. “In other categories of CPI inflation, pressures remained firm,” he said.
Daily data on 22 essential items covered by the department of consumer affairs suggest that food prices have increased by 2.3 percent in April till April 13. However, onion prices, LPG and kerosene prices have also declined int he first fortnight of April.
“These early developments suggest that inflation is on a declining trajectory having fallen 170 basis points from its January 2020 peak. In the period ahead, inflation could recede even further. barring any supply side shocks, it may settle well below the target of 4 percent in the second half of FY21. Such an outlook could make policy space available to address the intensification of risks for growth and financial stability brought around by Covid-19. This space needs to be used effectively and in time.”
Date for commencement of commercial operations, in NBFCs loans to commercial realty projects, can be extended by 1 year, Das said.
Lowers LCR Requirement
- LCR requirement for scheduled commercial banks is being brought down to 80 percent from 100 percent with immediate effect.
- It will be brought back up gradually.
On Banking Regulations
- In respect of all accounts for which banks and financial institutions grant a moratorium, the 90-day NPA norm will exclude moratorium period.
- Asset classification standstill for all accounts where moratorium granted.
- NBFCs do have flexibility to consider such relief to their borrowers.
- Banks will have to maintain additional provision of 10 percent on all such accounts over two quarters.
- Period of resolution plan as spelled out by June 7 circular extended by 90 days.
- Scheduled commercial banks and co-op banks will not make any further dividend payouts for profits from FY20 until further instructions.
RBI Cuts Reverse Repo Rate
The RBI slashed the reverse repo rate by 25 basis to 3.75 percent, Das said.
The repo rate remains the same since that decision is taken by the MPC, he added.
Refinancing Facilities
- To provide special refinance facilities of Rs 50,000 crore to NABARD, SIDBI, NHB to address sectoral credit needs.
- NABARD to receive Rs 25,000 crore to enable refinancing of rural regional banks, cooperative banks and microfinance institutions
- SIDBI will receive Rs 15,000 crore or on-lending and refinancing to scheduled commercial banks, non-banks and microfinance institutions
- NHB to receive Rs 10,000 crore to support housing finance companies
- Advances under these facilities will be charged as per the RBI policy repo rate of 4.40 percent
RBI will assess the situation and review in consultation with the institutions and will step up the level of liquidity support if required, he said.
Liquidity Management
After announcing measures to introduce liquidity worth 3.2 percent of the GDP int he last briefing, Governor Das is now announcing additional measures.
- Undertaking TLTRO-2.0 for amount of Rs 50,000 crore to begin with in tranches of appropriate sizes.
- RBI might step up this amount as per requirement.
- TLTRO-2.0 funds to be invested in bonds, CPs, NCDs of NBFCs with at least 50 percent going to mid-sized NBFCs and MFIs.
Das says he is announcing additional measures to address current conditions.
RBI Expects Sharp Economic Rebound In FY22
Since March 27, macro economic and financial landscape has deteriorated precipitously in some areas, Das said. “But light still shines through in others”.
Other key highlights:
- India among handful of countries projected to cling on tenuously to economic growth.
- Is expected to post sharp turnaround, resume pre-Covid trajectory with 7 percent growth in FY22.
- 21.3 percent growth in tractor sales up to February 2020 may provide offset to farm labour shortage resulting from lockdown.
- Revival in electricity generation halted by sharp fall of 25-30 percent in daily demand.
- Forex reserves currently cover 11.8 months of imports.
- Systemic liquidity surplus averaged at Rs 4.36 lakh crore from March 27 – April 14.
- Activity in corporate bond market has picked up appreciably.
- Indications that redemption pressures faced by mutual funds has moderated.
Governor Das Begins Address By Quoting Gandhi
Human spirit is ignited by the resolve to overcome the pandemic and it is during our darkest moments that we must focus on the light, Governor Das said today.
Reserve Bank of India Governor Shaktikanta Das begins briefing.
Rupee & Bond Performance Since Last Briefing
The Indian rupee has weakened 2 percent from the last policy announcement on March 27 while the 10-year bond yield, from 6.22 percent has gone to 6.44 percent.
On The Fiscal Side: PM Modi Reviews Virus Impact On Indian Economy
Prime Minister Narendra Modi on Thursday assessed the novel coronavirus’ impact on Indian economy and the possibility of a second stimulus package to boost sectors hit hard by the pandemic.
Several multilateral agencies, including the World Bank and the International Monetary Fund, have drastically cut their India GDP growth forecasts for 2020-21 after economic activity in the country halted due to the 40-day coronavirus lockdown.
While the World Bank expects India to grow at 1.5-2.8 percent in 2020, the IMF predicts a 1.9 percent expansion. The global economy, meanwhile, is in the throes of the worst recession since the Great Depression in 1930s, IMF said.
What Happened In The Last RBI Briefing
The Monetary Policy Committee reduced the repo rate by 75 basis points and the reverse repo rate by 90 basis points, without giving any outlook on growth and inflation.
Liquidity Measures
- RBI will conduct auctions of TLTRO of upto three-year tenor of appropriate sizes for a total amount upto Rs 1 lakh crore at a floating rate, linked to policy repo rate.
- CRR of all banks to be reduced by 100 basis points to 3 percent beginning March 28, for one year. This will release liquidity of 1,37,000 crore across the banking system
- These liquidity measures will inject liquidity of Rs 3.74 lakh crore to the system.
Regulatory Measures
- All lending institutions are being permitted to allow a moratorium of three months on repayment of installments for term loans outstanding as on March 1, 2020.
- Lending institutions permitted to allow deferment of three months on payment of interest w.r.t all such working capital facilities o/s as of March 1, 2020
- Deferring payments will not result in asset classification downgrade.
- Further deferring implementation of last tranche of 0.625 percent of capital conservation buffer to Sept. 30, 2020
- Banks in India that operate IFSC banking units allowed to participate in offshore INR NDF market w.e.f. June 1, 2020
Reserve Bank of India Governor Shaktikanta Das is set for a live briefing at 10 a.m. today as India continues to grapple with an increasing number of Covid-19 infections and the economic fallout from a necessary lockdown.
This is the second such briefing being conducted by Das amid the outbreak. The last one was on March 27 where the central bank slashed rates ahead of its time and introduced more than 3.7 lakh crore in liquidity through various measures.
The government is slated to sell Rs 20, 000 crore ($2.6 billion) of bonds. Its first auction of Rs 19,000 crore was unexpectedly fully subscribed as investors bought on expectations that the Reserve Bank of India would purchase more debt in the secondary market to cap rising yields.
The government is selling Rs 45,000 crore of debt, including Treasury bills, every week for the first half of the fiscal year to help fund Prime Minister Narendra Modi’s record borrowing plan of Rs 4.88 lakh crore during this period. The weekly debt issuance is about 20 percent higher than a year ago.
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