Following up on the central government’s Rs1.7-lakh crore economic package aimed largely at the vulnerable sections of the society, the Reserve Bank of India (RBI) on Friday launched a full-frontal assault with a slew of monetary initiatives that are expected to release Rs 3.75 lakh crore of liquidity into the system as India fights against a grave economic crisis triggered by an export called coronavirus. With the 21-day ongoing national lockdown bringing economic activity to a screeching halt from March 25, the economy is running on fuel as a billion plus people remain mostly at their homes. Financial markets crashed in a manner resembling nine pins. The Indian rupee has weakened and crossed the 75-mark against the US dollar. There was a massive demand for stimulus to nurse back the economy to health. The entire living world is in the grip of this virus, which has resulted in over 5.65 lakh cases of infection and over 25,500 deaths. How will the RBI’s bazooka help? Will it be enough? Read on.
Central bank approach
On March 24, Prime Minister Narendra Modi-led NDA government ordered a nationwide lockdown for 21 days, limiting movement of the entire 1.3 billion population of India. This was done as a preventive measure towards the 2020 coronavirus pandemic in India. The lockdown was placed when the number of confirmed positive coronavirus cases in India was relatively low, and to prevent the scene from worsening. On Friday night, India reported over 860 cases in total, but that is small compared to United States with over 92,000 cases, China with over 81,000 cases, Italy with over 80,000 cases, Spain with over 64,000 cases, and Germany with 49,000 cases.
The lockdown has not been without its economic side-effects. To deal with them and also to complement the central government’s steps, the RBI announced a set of measures. The MPC in fact met before its April 3 due date. Below are the steps announced.
One, RBI has cut policy repo rates by 75bps from 5.15 per cent to 4.40 per cent and reverse repo by 90bps from 4.90 per cent to four per cent. Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.65 per cent from 5.40 per cent.
Two, the RBI reduced Cash Reserve Ratio (CRR) by 100 basis points from four per cent to three per cent of NDTL (Net Demand and Time Liabilities) for the period of one year till Mar 26, 2021. This would release primary liquidity of about Rs 1.37 lakh crore in the banking system. It has also reduced the minimum daily CRR requirement from 90 per cent to 80 per cent of total for three months till June 26, 2020.
Three, the RBI has increased the borrowing limit under Marginal Standing Facility from two per cent to three per cent of NDTL. This would allow banking system to avail an additional liquidity under LAF window.
Four, the RBI said it will conduct targeted term repos of up to three years tenor for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate which has to be deployed in investment grade corporate bonds, commercial papers, and non-convertible debentures. Investments made by banks under this facility will be classified as Held-To-Maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will also not be reckoned under the large exposure framework.
Five, all commercial banks, co-operative banks, all-India financial institutions, and NBFCs are being permitted to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as on March 1, 2020.
Six, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect to working capital facilities.
Seven, lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers without changing the asset classification.
Cyril Shroff, managing partner, Cyril Amarchand Mangaldas, said: “The RBI has unleased a bazooka to deal with the economic pain and uncertainty prevailing in the wake of the COVID crisis. Acting swiftly and decisively, the RBI has used several levers to increase liquidity in the system. This empowers banks to commence or continue the emergency COVID credit lines opened up by several of banks.”
Even though the system has enough liquidity, the RBI’s steps are set to provide banks with more money which can be deployed. “Cumulatively these measures should release Rs 3.75 lakh crore into the system which is already surplus with liquidity. These steps will lead to a decline in lending rates, declogging credit flow at least to the mid and higher rated entities for now and keep the money markets well lubricated,” says Kumaresh Ramakrishnan, CIO (fixed income), PGIM India Mutual Fund.
Zarin Daruwala, CEO (India), Standard Chartered Bank, said: “The bold steps initiated by the Monetary Policy Committee (MPC) should help financial markets tide over the current situation. The 100 bps Cash Reserve Ratio (CRR) cut along with the 75bps repo rate cut and additional liquidity under marginal standing facility (MSF), will free up precious term liquidity to augment the government’s fiscal efforts. The 3-year targeted long-term repo operations (TLTRO) will decongest credit channels and lower the cost of credit, providing much needed relief to corporates. The moratorium on loan EMIs, term loans and working capital facilities, is expected to provide relief to retail and corporate customers during these uncertain and challenging times.”
RBI’s recent modus operandi of utilizing multiple levers beyond just policy rates to tackle issues at hand has been on full display again in today’s monetary policy.
“Reverse repo rate of four per cent will ensure that parking even low-cost deposits like savings bank account, net of CRR, has turned near unremunerative for most banks thus pushing them to lend to more productive segments of economy. CRR cut would further free up primary liquidity of Rs1.37 lakh crore and also help drive MCLR lower,” says Piyush Baranwal, senior fund manager (fixed income), Yes Asset Management (India).
The issue of ample systemic liquidity, but capital-starved borrowers will partly be addressed by Rs1 lakh crore of TLTROs (Targeted longer-term refinancing operations) as this money has to be compulsorily lent to investment grade NCDs (non-convertible debentures) and CPs (commercial papers) which have also been provided additional HTM (hold-to-maturity) benefit. The mandate of using this window for both primary and secondary market securities at once provides much needed money to corporate borrowers as well as investors in need of liquidity such as NBFCs and MFs.
“The real out of the box move though was the Targeted Long-Term Repo Operations, whereby banks will be forced to buy up to three year corporate bonds. We had seen, in the last two weeks, a very sharp increase in market yields of even high rated PSU corporate bonds indicative of market dislocation and risk. This TLTRO will help getting back liquidity into the corporate bond markets and will also lead to a fall in short term bond yields of AAA corporates,” points out Arvind Chari, head (fixed income & alternatives), Quantum Advisors.
While RBI’s quiver has many more such arrows which have not been utilized this time despite suggestions, it would have been silly for RBI to unleash it’s entire arsenal without even knowing the size of the enemy it is battling. These tools could thus get utilized in the future depending on how the current stress evolves. For now, however, a strong display of resolve to address a rapidly deteriorating situation and utilizing of multiple levers towards the same should provide a great deal of comfort to all and sundry, notes Baranwal of YES Asset Management (India).
Banks start cutting rates
Lending rates will come down fast, and so will deposit rates. Transmission should be quick as lending rates on fresh bank loans to SMEs, mortgages and retail are now linked to RBI repo rates. While nominal MCLR has come off 54bp FYTD, on RBI easing, real MCLR has risen by 67bp due to falling core WPI inflation. The RBI rate cut should defuse this rise in real lending rates. The 100bp CRR cut allows banks to cut lending rates by 5-10bp.
SBI has already announced passing of the entire 75 bps repo rate cut to its borrowers. Responding to RBI’s extraordinary monetary policy measures to support the wider economy, SBI passes on the entire 75 bps Repo rate cut to its borrowers availing loans linked to External Benchmark linked lending rate (EBR) as well as Repo Linked Lending rate (RLLR). With this revision, SBI’s EBR & RLLR came down by 75 bps w.e.f April 1, 2020. Consequently, EMIs on eligible home loan accounts (linked to EBR/RLLR) get cheaper by around Rs 52 per 1 lakh on a 30-year loan.
In view of adequate liquidity in the system and the additional liquidity measures announced in today’s monetary policy, SBI has realigned its interest rate structure on deposits w.e.f. March 28, 2020. Retail TD interest rates reduced by 20 bps to 50 bps across tenors. Bulk TD interest rates reduced by 50 bps to 100 bps across tenors.
Shanti Ekambaram, group president (consumer banking), Kotak Mahindra Bank, feels the RBI measures will ease financial pressures on businesses and individuals by way of a moratorium of three months on term-loan repayments, interest on working capital facilities and easing of working capital norms will bring big relief to small and medium sized companies and individual borrowers. The move will also help banks as these will not be classified as NPAs.
“Most reassuring were the statements by RBI that they will continue to stay very vigilant and will do what it takes to support the economy in the wake of the pandemic, through both conventional and unconventional instruments,” she says.
Whatever it takes?
The RBI has gone all out to fight the economic fallout of Covid-19. Vijay Chandok, MD & CEO, ICICI Securities, feels that although the rate cut is big, the economy will benefit more from the liquidity and regulatory actions. The RBI has pumped liquidity into the system through targeted long-term operations and CRR cut. They have also taken a series of measures to nudge banks to lend to the productive sectors of the economy. Moreover, regulatory measures such as relaxing debt servicing burden and working capital financing till June 2020 are likely to help business during this crisis, added Chandok.
For borrowers, there is some relief with the 3-month moratorium. The moratorium of three months of EMIs on all outstanding loans will be a major relief to all concerned stakeholders, including home loan borrowers and developers. Developers now get breathing space to get their financial act together, at least for now. Moreover, the fact that non-payment of EMIs will not cause loans to turn bad is a major relief, remarks Anuj Puri, chairman, Anarock Property Consultants.
In terms of investor implications, the recent volatility had spooked many. Suyash Choudhary, head (fixed income), IDFC AMC, said: “Investors have understandably been very concerned with the very large market volatility in the past few weeks. It is here that speed of action from the central bank is also important alongside the size, since greater speed controls the unnecessary destruction of risk capital in the system. Nevertheless now that RBI’s hand is revealed, market volatility should substantially lessen allowing investors to focus on the medium term.”
According to Dhiraj Relli, MD & CEO, HDFC Securities, financials will get breathing space as far as recovery and NPA recognition is concerned. It could elevate sentiments temporarily, but the main impact will be visible post the lifting of lockdown. In the interim softer yields could benefit investors in Gsec/other debt papers (including Banks) to book some MTM gains.
For the moment, the worries around inflation have subsided. RBI did not provide any growth and inflation projection at this stage, as the 21-day nationwide lockdown makes it difficult to have a clear picture of the evolving growth-inflation mix. However, it is amply clear from recent developments that risks to growth are a much bigger concern at this stage relative to inflation, says Franklin Templeton MF.
You may recall that the government on its own had announced a financial package. The Finance Minister (FM) has announced an economic package that includes cash transfers, food distribution, and support for organised sector.
Some analysts believe that the central government package is small compared to requirement. “Compared to the holistic and unconventional measures from the RBI, the Rs1.7 lakh crore (0.8% of GDP) fiscal package to support the weaker sections is disappointing. In our view, the actual additional expenditure may be around Rs 65,000 (0.3% of GDP). The announcements mainly involve reallocation and front-loading of expenditure. We definitely believe that front-loading of expenditure and measures to support the weaker sections are necessary, but these measures are not sufficient to prop up plummeting growth, or to stimulate demand when the lockdown ends,” said Teresa John, research analyst (economist), Nirmal Bang Institutional Equities.
Clearly, more is expected from the government. “The fiscal stimulus from the government (~0.8% GDP) announced on March 26, 2020, has been a starting point and will benefit the under-privileged sections of society (who need immediate assistance). However, we feel that at-least a 1.5-2 per cent of GDP fiscal stimulus is needed in the current situation, and there should be more measures from the government over time. During the global financial crisis, we have seen the central fiscal deficit expanded from 3.4 per cent of GDP in FY07 to 6.1 per cent in FY09 and 6.6 per cent in FY10, so that was quite a large and extended fiscal stimulus. We are not saying that the fiscal stimulus needs to last for so long (as it can be damaging in the long term for the economy), but in short-term it is required to help aid the economy and prevent a severe shock,” points out Sampath Reddy, CIO, Bajaj Allianz Life.
The writer is a journalist with 14 years of experience