Anushruti Singh
Close on the heels of the financial package for poor, announced by the government to ease the economic impact of the Corona pandemic; the RBI Monetary Policy Committee cut interest rates sharply to a two-decade low, surpassing market expectations. Besides, the Reserve Bank of India (RBI) announced a slew of new measures to address the stress in the economy caused by the pandemic, such as injecting sizeable liquidity in the financial system, ensuring credit flow, relaxation in repayment and debt servicing pressures and improving the functioning and stability of the financial markets. Temporary compliance relaxations were also announced.
RBI Liquidity Injection
Focusing on the adequate liquidity in the system, RBI has tuned in Rs. 3.74 lakh crores on account of the measures announced concerning Targeted Long Term Repo Operations (TLTRO), CRR cut, increased MSF accommodation.
- Rs.1 lakh crores is to be raised by way of auctions of TLTRO (3 years tenor at a floating rate linked to the policy repo rate).
- The CRR cut would release liquidity of about Rs. 1.37 lakh crore across the banking system.
- The increased borrowing under MSF would bring about an additional Rs. 1.37 lakh crore of liquidity. A sum of Rs 3.74 lakh crore is now available in the system which combined with the earlier operations would be 3.2 per cent of GDP.
RBI on Growth
The RBI has clearly stated that they would not like to make any projections right now since there are several changes taking place and no one is sure when it will end. The impact on GDP will depend on how long the virus lasts and how deeply does it penetrate the system. But there will be scaling down of growth in Q4 which will be lower than 4.7 per cent which was projected earlier by CSO.
RBI on Inflation
The RBI has retained its target for consumer price index (CPI) inflation at 4 per cent within a band of +/- 2 per cent. The RBI expects overall demand to weaken on account of the pandemic. Additionally, the sharp decline in international crude oil prices could provide further relief depending on the pass-through to retail prices.
“Although there were expectations of monetary policy actions from the RBI, the measures announced today have surpassed marked expectation,” assessing the announcements made, credit rating agency, CARE Ratings said.
“These measures would greatly help improve sentiments and confidence in the financial system. Moreover, the maintenance of accommodative policy stance and assurance that the RBI would continue to monitor evolving situation and stands ready to take conventional and unconventional measures has given rise to expectations that the RBI may reduce rates further and pump liquidity into the system to stimulate economic activity when the situation returns to normal in next 2-3 months.” Agency added.
While hailing the decisions taken by RBI to mitigate economic challenges, NITI Aayog CEO Amitabh Kant called them progressive and timely measures.
Taking it to twitter, Kant lauded RBI governor Shaktikanta Das and said he had provided much-needed relief to working capital with his announcement.
Claiming the announcements suitable for real estate sector, Rajan Bendelkar, President, Western Region, Naredco and Director of Raunak Group also welcome the steps. He said at the time when markets are in already prevailing recessionary conditions, the RBI’s much – needed liquidity infusion of Rs 3.74 Lakh crore into the economy comes as a significant relief for the country.
“The repo, reverse repo rate, and CRR cuts would extend more lending powers to the banks. It’s an attempt to ensure financial stability and confidence that the financial markets needed. A moratorium of three months on repayment of loans and interest thereon, with a further assurance of not classifying such assets for downgrading, will give relief to the homebuyers and businesses. It will ease them from financial burdens and help them plan financial priorities better in this challenging time. The RBI has also assured that the banking system was sound and there was no need to be panicky about it. But, all this has highlighted the fact that the real estate is a safe asset – class, as it is a physical one. It is evident when cash flows and liquidity have impacted all other asset classes severely.”
The RBI announcement came days ahead of the scheduled MPC meeting to be held on 31-3 April ’20. The decision to cut the policy rate was unanimous. However, in terms of quantum of rate cut, four members voted for a 75 bps cuts while two members sought a 50 bps cut.
Here are the key announcements on Policy Rates, Developmental and Regulatory Policies
- Repo rate cut by 75 bps from 5.15 per cent to 4.40 per cent with immediate effect.
- The reverse repo rate would be 40 bps lower than repo rate from the earlier 25 bps.
- Marginal standing facility (MSF) rate to be 4.65 per cent and the bank rate to be 5.40 per cent.
- Accommodative monetary policy stance to continue along with inflation target of 4per cent (+/-2per cent).
- Targeted Long Term Repo Operations (TLTRO) of Rs. 1 lakh crores (3-year tenure).
- The liquidity on account of TLTRO to be deployed by banks in investment-grade corporate bonds, commercial papers, and non-convertible debenture over their investments in these as on March 27 ’20. Fifty per cent of investments have to be in primary market issuances and balance in secondary markets.
- CRR (cash reserve ratio) reduced by 100 bps to 3 per cent of NDTL w.e. f from 28 March’20 for 1 year.
- Reduce the requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per cent for a period of 3 months wef from reporting fortnight of March 28, 2020 till.
- Increase limit of borrowing under MSF from 2 per cent to 3 per cent of Statutory Liquidity Ratio (SLR) till June 30, 2020.
- 3 months moratorium in respect on all term loans of commercial banks, all India financial institutions and NBFCs outstanding as on March 1 2020 . These include retail loans.
- Deferment of interest on working capital facilities for a period of 3 months for all facilities outstanding as on March 20, 2020.
- Deferment in working capital facilities will not result in asset classification downgrade.
- Easing of working capital financing – lending institutions can reduce margins and/or reassess the working capital cycle for the borrowers. It will not result in asset classification downgrade.
- Deferment of Implementation of Net Stable Funding Ratio (NSFR) by 6 months from April 1, 2020 to October 1, 2020.
- Deferment of implementation of capital conservation buffer (CCB) under Basel III norms for the last tranche of 0.625per cent of the CCB from March 31, 2020 to September 30, 2020.
- Permitting banks to participate in the offshore Indian Rupee (INR) derivative market – the Non-Deliverable Forward (NDF) market with effect from June 1, 2020.
