A great step to deal with current ambiguity
Brickwork Ratings is India’s home-grown credit rating agency built with superior analytical prowess from industry’s most experienced credit analysts, bankers and regulators has focussed on RBI’s recent measures! The Reserve Bank of India (RBI) convened its Monetary Policy Committee (MPC) meeting well before its scheduled of April 2020, considering the urgency of intervention in the wake of severe uncertainty caused by the COVID-19 outbreak.
The RBI deserves to be complemented for its comprehensive intervention in advancing an accommodative monetary policy, ensuring adequate liquidity and creating greater clarity through regulatory forbearance. The major announcements by RBI MPC include a 75 basis points (bps) cut in the repo rate cut by 75 basis points (bps) to 4.4%, reverse repo by 90 bps to 4%, and the widening of the LAF corridor from 50 bps to 65 bps, in addition to continuing the accommodative monetary policy stance.
The stance taken by the RBI are as per expectations, includes enabling an adequate and cheaper working capital, supporting corporates suffering from business losses and introducing forbearance measures and additional liquidity infusing tools. However, the RBI has been bold and gone well beyond the market and BWR expectations in cutting the repo rate by 75 basis points.
As the current situation has created considerable uncertainty, the MPC has understandably refrained from providing a growth outlook for the next fiscal. The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. Most sectors of the economy have adversely been impacted due to lockdowns related to the COVID-19 outbreak and the imposition of social distancing.
All sectors, except the continuing resilience of agriculture and allied activities, are likely to show sharp deceleration. However, on the inflation front, the MPC expects some ease, taking cues from falling crude oil prices, and food and core inflation. Overall, the tone of the MPC lays greater emphasis on downward risk to growth, led by weakening demand and supply.
In addition to massive rate cuts, the RBI governor announced substantive measures to address stress in financial conditions caused by COVID-19, in its accompanying “Statement on Developmental and Regulatory Policies”.
Expanding liquidity in the system substantially to ensure financial markets and institutions are able to function normally in the face of COVID-related dislocations, reinforcing monetary transmission so that bank credit flows on easier terms are sustained to those affected by the pandemic, easing financial stress caused by COVID-19 disruptions by relaxing repayment pressures and improving access to working capital, and improving the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic are the major ones.
To ensure adequate liquidity is available to all constituents, the RBI introduced an instrument called Targeted Long-Term Repos Operations (TLTROs), of up to three years tenor, of appropriate sizes for a total amount of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate.
Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on 27 March 2020.
As a one-time measure, to help banks, the RBI reduced the cash reserve ratio (CRR) of all banks by 100 bps to 3.0% of Net Demand and Time Liabilities (NDTL) with effect from the reporting fortnight beginning 28 March 2020.
This will release primary liquidity of nearly Rs 1,37,000 crore uniformly across the banking system in proportion to the liabilities of constituents, rather than in relation to the holdings of excess SLR. A one-time dispensation of reducing the requirement of minimum daily CRR balance maintenance from 90% to 80%, effective from the first day of the reporting fortnight beginning 28March 2020 up to 26 June 2020, is also aimed at easing banks’ daily liquidity operations.
In view of the exceptionally high volatility in domestic financial markets, which bring in phases of liquidity stress, and to provide comfort to the banking system, the RBI increased the limit to borrow overnight under the Marginal Standing Facility (MSF), from the current2% to 3% of the SLR with immediate effect.
Alongside the above liquidity measures, the RBI also announced regulation and supervision measures to mitigate the burden of debt servicing. All commercial banks, co-operative banks, all-India Financial Institutions, and NBFCs and all lending institutions are being permitted to allow a moratorium of three months on the payment of instalments with respect to all term loans outstanding as on 1 March 2020.
To enable borrowers to tide over the economic fallout, with respect to working capitalfacilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on interest payment for all such facilities outstanding as on 1 March 2020.
The accumulated interest for the period will be paid after the deferment period expires. The same will not be treated as a change in the terms and conditions of loan agreements due to financial difficulty faced by borrowers and, consequently, will not result in an asset classification downgrade.
With respect to working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions may recalculate the drawing power by reducing margins and/or reassessing the working capital cycle for the borrowers. The rescheduling of payments will not qualify as default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions.
The RBI deferred the implementation of the Net Stable Funding Ratio (NSFR) by six months from 1 April 2020 to 1 October 2020 and the last tranche of 0.625% of the capital conservation buffer (CCB) from 31 March 2019 to 31 March 2020.
To improve the efficiency of price discovery, the RBI permitted banks in India that operate International Financial Services Centre (IFSC) Banking Units (IBUs) to participate in the NDF market with effect from 1 June 2020.
