Key Highlights
The Monteray Policy Committee today reduced the repo rate by 75 basis points and reverse repo rate by 90 basis points, in light of the coronavirus pandemic. It further refrained from projections of growth and inflation as the outlook is heavily dependent on the spread and containment of the virus.
It announced a number of measures to increase liquidity and ease banking regulations during the challenging times.
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
- MSF raised from 2 percent of SLR to 3 percent with immediate effect. Applicable upto June 30, 2020.
- These three 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
Forward Looking Guidance
The RBI will continue to remain vigilant and take whatever steps needed to mitigate the economic impact of Covid-19 and maintain financial stability in the country. All instruments - conventional and unconventional are on the table.
The banking system is sound and macro economic fundamentals are stronger than they were after the global financial crisis, Das said.
Borrower Will Have Choice To Opt For The Moratorium, Says SBI Chairman
- Moratorium will be available to all eligible borrowers automatically.
- Term loan installments will get automatically deferred.
- Will apply to all term loans including housing and personal loans.
- Clarity needed on whether it applies to credit cards.
- No impact on banks profitability since income will continue to accrue. Only recovery is on hold for three months.
How Economists And Bankers Reacted
Sonal Verma: Chief India Economist, Nomura
- Fairly comprehensive package, RBI has delivered a whole bazooka
- Cutting reverse repo disincentivises banks from parking excess liquidity with RBI
- Targetted LTROs, for investing in specific corporate bonds, NCDs, will help narrow credit spread
- Blanket 100 bps cut in CRR is going to benefit all banks equally
- Covid-19 has dealt a cash flow shock; delaying asset classification norms by 3 months right way to go
- RBI said conventional & unconventional measures on the table; that's a very strong signal
- RBI response came in later than expected, but it has been worth the wait
- RBI has delivered whatever they could at this point in time
- 21-day shutdown is to reduce 4.5 percentage points off annual GDP
- Economic hit significant; has to be a coordinated policy response
- RBI's monetary policy measures may not matter immediately, but it will over the matter of time
- More fiscal measures need to happen
- RBI's moratorium to banks will help avert permanent damage to the economy
Ananth Narayan, Professor, SPJIMR
- RBI delivered relief to the financial services system, and ensured forbearance on loans to overall society
- This is going to be a long-drawn out situation; we are in uncharted territory
- RBI was right to worry about the stress in the credit market; corporate debt market had become illiquid
- Last thing you wanted was for the corporate debt market to reflect stress
- Expect corporate spreads to come down immediately
Arvind Chari: Head of Fixed Income & Alternatives, Quantum Advisors
- Effective rate could go down to reverse repo rate, given the fact that there's been a large CRR cut
- RBI moving to full-service central bank, not just an inflation targetting central bank
- RBI's response has been very bold
Keki Mistry: Vice Chairman & CEO, HDFC
- Comprehensive package from the RBI; addresses multiple challenges
- One thing missing was a one-time restructuring of loans
- Term loans to my mind includes all retail loans - home & auto included, and the measure will be extended to NBFCs, HFCs
- Need clarity on one point: If there's a deferment of payment by clients, how will HFCs & NBFCs get the liquidity to pay their lenders?
DK Joshi: Chief Economist, Crisil
- Fiscal policy will have to go beyond welfare measures & announce relief to SMEs hit by the lockdown
- 75 bps cut becomes amplified due to the 90-bps reverse repo reduction
- RBI's earlier liquidity measures will be complemented by today's rate cuts & measures like allowing banks to participate in the NDF market
- RBI moved very swiftly; but expect RBI to keep updating their response based on the evolving situation
Abizer Diwanji: Partner, India Financial Services Leader, EY
- Banks did not have a liquidity issues, the problem was transmission. Don’t think transmission will happen to where it is required.
- Hope the RBI ensures transmission of rate cuts via PSU banks
- If that happens, PSU banks may have to rely on government scheme for more directed lending.
- No announcements on how funds will flow to NBFCs – a great transmission tool in our system.
- Three months is a good breather to allow corporate to manage their cash flows better.
- Would have liked a June seven-type circular imposition in tough times to say that you have to follow the inter-creditor agreement sign ups.
Forward Guidance
- Since the last MPC meeting in February, The Reserve Bank of India has injected liquidity worth Rs 2.8 lakh crore. It amounts to 1.4 percent of GDP.
- With today’s measures, we have injected liquidity which amounts to 3.2 percent of GDP.
- RBI will continue to remain vigilant and take whatever steps needed to mitigate the economic impact of Covid-19 and maintain financial stability in the country. All instruments - conventional and unconventional are on the table.
- Banking system is sound. Would be fallacious to link share prices with safety of deposits in banks.
- Do not resort to panic withdrawal of funds from private banks.
- Despite the challenging circumstances, I remain optimistic. Economy remains stronger than it was in the aftermath of the global financial crisis.
- Fiscal deficit, CAD, financial volatility all lower now, inflation conditions benign
Measures On Regulation And Supervision
- 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.
- The moratorium on deferment of payment of term loans will not lead to asset classification downgrade.
- 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 of interest payment on working capital will also 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
Widening MPC Rate Corridor
It has been decided to widen the policy rate corridor fromt he existing 50 basis points to 65 basis points, Das said.
Measures To Expand Liquidity To Ensure Smooth Functioning Of Financial Institutions
A multi-pronged approach has been adopted to ensure liquidity, Das said.
- 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.
- Liquidity availed under this by banks have to be deployed in commercial papers, investment-grade corporate bonds and non convertible debentures, over and above their investment in these as of March 25, 2020.
- Eligible instruments include those in primary markets and secondary market purchases such as mutual funds.
- Investments made by banks under this facility will be classified held-to-maturity even in excess of 25 percent of total investment permitted in HTM portfolio
- First TLTRO action of Rs 25,000 cr will be conducted later today
- 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.
- MSF raised from 2 percent of SLR to 3 percent with immediate effect. Applicable upto June 30, 2020.
These three liquidity measures will inject liquidity of Rs 3.74 lakh crore to the system.
Other Highlights
- Banks have been parking daily average of Rs 3 lakh crore under reverse repo
- Intend to mitigate negative effect of virus, revive growth, and above all preserve financial stability
- War effort being mounted to fight virus, using conventional & unconventional measures in battle ready mode
- RBI active on daily basis with efforts to alleviate financial stress, keep system sound and functioning
- MPC noted that global economic activity has come to a near standstill
- Expectations of a shallow recovery have now been dashed
- Rising probability that large parts of the world will slip into recession
This kind of uncertain outlook has never been seen before...need of the hour is to do whatever is necessary to shield the economy from the pandemic.Shaktikanta Das, Governor, RBI
- Previous GDP growth estimates now at risk
- Inflation prints of Jan and Feb that actual outcomes running 30 basis points above earlier projections
- Food prices may soften further until the onset of usual summer uptick
- As a result of covid-19, aggregate demand may weaken and ease core inflation further
- Projections of growth and inflation heavily contingent on intensity, duration and spread of covid-19
- MPC refrained from giving specific growth and inflation numbers as outlook is uncertain
MPC Cuts Rate By 75 Basis Points
In view of the covid-19 pandemic, the MPC reschedules its meeting.
The MPC voted for sizable reduction in repo rate, maintaining accommodative stance in order to boost growth and maintaining financial stability while keeping inflation in the mandated range.
With this, the MPC has decided to slash the repo rate by 75 basis points, Das said. Reverse Repo Rate has been cut by 90 basis points, making it unattractive for banks to deposit funds with RBI
Das’ address begins.
RBI Governor Shaktikanta Das’ press conference will begin any second now.
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Also Read: Coronavirus Response: RBI’s Nuclear Options
Other Expectations: Loan Forbearance, Relief For Corporate Bonds
Amid expectations of loan forbearance measures from the RBI, some states like Tamil Nadu had asked lenders to stop collecting loan repayments. Microfinance firms had also stopped collections following an advisory from its industry body.
The stoppage of physical loan collections presents two dilemmas for lenders. First, banks have to classify an account as a bad loan if repayments are overdue for more than 90 days. Second, liquidity generated by repayments for fresh lending gets squeezed.
The RBI is also expected to announce relief for the corporate bond segment by opening a liquidity facility for mutual funds. Funds, facing redemption pressures, had been selling corporate bonds, leading to a spike in yields on these securities.
For at least the last one week, primary corporate bond issuance have been at a virtual standstill. At the same time, secondary market yields have risen. This is despite the RBI providing ample liquidity.
Rate Cut In Offing?
Indian central bank’s monetary policy panel concluded an unscheduled meeting earlier this week to decide on measures it can take to tackle the fallout of the coronavirus outbreak on Asia’s third-largest economy, people with knowledge of the matter said. The next scheduled MPC meeting in on April 3.
If the MPC chooses to slash rates today, it would be keeping in line with actions taken by most central banks around the world. The U.S. Federal Reserve had reduced its interest rates to nearly zero within just a week, earlier this month.
The RBI’s MPC has been on pause since December citing high inflation, after easing policy five times last year.
The RBI has announced a series of steps to add liquidity to the system since then. It has conducted $4 billion in long term forex swaps to ensure dollar liquidity. It has also announced Rs 1 lakh crore in long term repo operations and added short term liquidity through its repo window.
Reserve Bank of India Governor Shaktikanta Das is set to address a press conference at 10:00 a.m. today amid expectations of measures around loan forbearance, exemption of EMI payments, relief for corporate bonds and a possible emergency rate cut amid the coronavirus outbreak.
The central bank’s measures would be the second prong to address the economic disruption caused by the necessary 21-day lockdown announced by Prime Minister Narendra Modi on Tuesday. This will be in addition to the government’s fiscal measures announced yesterday.
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