Due to uncertainties that have risen due to pandemic, it might even result in a lot of global economy going into recession. This has resulted all central banks to announce various conventional and unconventional methods to keep the markets and liquidity functioning smoothly. Today RBI has joined the pack and offered various measure to ensure the same.
Since last MPC meeting RBI has infused about Rs. 2,80,000cr (1.4% of GDP) through various instruments. New measures announced will bring an addition of Rs.3,74,000cr ( 1.8% of GDP) making it total 3.2% of GDP liquidity infusion provided since Feb 2020.
The Measures announced were focused on liquidity expansion, market transmission of rates and improve functioning of currency and debt market.
Details of the Measures are below:
REPO RATE: Monetary Policy Committee held an emergency meeting this week and voted 4-2 for 75bps rate cut bringing Repo Rate from 5.15% to 4.4% below Global Financial Crisis of 4.5%.
CASH REVERE RATIO: For all banks the CRR is cut by 100bps to 3% for one year. This will infuse liquidity of Rs.1,37,000cr.
TARGETED LONG TERM REPO OPERATION: It will auction instruments up to 3 years tenure not exceeding amount of Rs. 1,00,000cr in total and this will be done at floating repo rate. This amount will be utilised by banks to buy Investment grade corporate bonds / NCDs from Mutual Funds and NBFCs and will be treated as HTM.
MARGINAL STANDING FACILITY: It is cut from 2% of SLR to 3% till 30th June 2020. This will infuse liquidity of Rs. 1,37,000cr.
MONETARY POLICY RATE CORRIDOR: Rate has been widened from 50bps to 65bps. The reverse repo rate LAF will be lower by 40bps as against 25 bps.
EMI DEFERMENT: All lending Institutions are allowed to defer the instalments on all kind of term loans outstanding for three months starting from 1st March 2020.
WORKING CAPITAL FINANCING: i) Lending institutions are allowed to recalculate drawing power in cash credit / over draft by a client and it will not be treated as an NPA.
ii) All lending institutions are allowed to defer interest on the working capital loans for three months.
NET STABLE FUNDING RATIO: The implementation of the same was due from April 1st 2020 that is delayed to 1st October 2020.
LAST TRANCHE OF CAPITAL CONSERVATION BUFFER: The tranche of 0.625% has been deferred to 1st September 2020.
CURRENCY NDF MARKET: Banks with IFSC Banking Units are allowed from 1st June 2020 to participate in NDF market.
The majority of measures ate inline with global central banks and period uncertainty combined with higher inflation it is very important for financial stability to remain.
According to us, the measures announced address full spectrum of issues that have been raised due to lockdown and other uncertainties arising from coronavirus pandemic. Though we believe rate cut is a necessary tool and will provide a relief for the borrowers, a higher transmission of the same due to various requirement changes from RBI the banks might some NIM pressure.
The liquidity provided for the purpose of stability in debt market is very important, as the credit spreads in corporate debt market have spiked in last 20 days. Along with it liquidity provided directly to banks via reducing the requirements help in reduction of cost of funds and address the problem of panic withdrawals in some banks.