On Friday, the Reserve Bank of India (RBI) pulled out all the stops to stop a potential slowdown caused by the coronavirus (Covid-19), lowering the repo rate by 75 basis points to 4.4%, and informing all banks and housing finance companies must not accept payments on term loans for three months.
“Given the pressure from COVID-19, the six-member Monetary Policy Committee (MPC) moved its meetings from March 31 to April 3 to March 24, 26 and 27 and voted 4: 2 to bring the repo rate down to 4.4%, “said Governor of the Reserve Bank of India, Shaktikanta Das, who spoke to the media via video streaming.
External members Chetan Ghate and Pami Dua voted for a reduction of 50 basis points, while others, including Das, favored 75 basis points.
His position remained accommodating.
At the same time, the reverse repurchase rate, which is the rate at which banks keep their excess funds with the RBI, has been lowered by 90 basis points, to “make it relatively unattractive for banks to passively deposit funds to the Reserve Bank and instead use these funds to retrocede credits to productive sectors of the economy, “said the governor.
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Inflation vs growth
The central bank did not hesitate to guess the figures for growth and inflation, “given this increased volatility, unprecedented uncertainty and an extremely fluid situation”. Estimated annual growth of 5% for the whole year “is now threatened by the impact of the pandemic on the economy,” warned the Governor of the RBI.
The growth and inflation projections will strongly depend on the intensity, spread and duration of COVID-19. It is precisely for these reasons that the MPC refrained from giving specific figures for growth and inflation.
Food inflation is likely to collapse in the coming months, but “apart from the continued resilience of agriculture and related activities, most other sectors of the economy will be affected by the pandemic, according to… its intensity, spread and duration, “said the governor. said.
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“The MPC believes that the macroeconomic risks, both on the demand and supply side, caused by the pandemic could be serious. The need of the hour is to do whatever is necessary to protect the national economy from the pandemic, ”said Das in his speech.
“Banks and other financial institutions should do everything in their power to maintain credit to economic agents facing financial stress due to the isolation that the virus has imposed”, while markets should continue to function, and “rigorous tax measures are essential to deal with the situation,” said the Governor of the RBI.
The political decisions taken at the monetary policy committee (MPC) out of turn meeting were justified by the destructive force of the coronavirus. It aims to (a) mitigate the negative effects of the virus; (b) revive growth; and most importantly, (c) preserve financial stability, “said the Governor of the RBI.
In addition to rate cuts, there are also a range of measures to meet the economy’s liquidity and credit needs. This included letting the common man not pay his equivalent monthly installments (EMI) for three months on long-term loans.
While bankers decided to cut rates, State Bank of India president Rajnish Kumar said in a media appeal that his banks would not ask for payments on term loans for three months.
“Payments will automatically be deferred for three months for term loans and customers do not have to request them from banks,” Kumar said during the call, adding that banks can formulate their own policies on new loans “taking into account the repayment capacity of borrowers” “.
In the absence of a healthy credit recovery, banks parked near Rs 3 trillion on an average daily basis as part of the reverse repo.
The RBI has called the present time “an extraordinary and unprecedented situation”, in which everything depends on the depth of the COVID-19 epidemic, its spread and its duration.
“Clearly, a war effort must be mounted and is underway to fight the virus, involving conventional and unconventional measures in combat-ready mode.”
“Life at the time of COVID-19 was one of unprecedented loss and isolation. However, it is worth remembering that hard times never last; only difficult people and institutions do it, “said the Governor of the RBI.
The bond market was more than surprised by the RBI’s decision. Bond yields rebounded from 30 to 35 bps in the short term and 15 bps in the long term after the announcement.
“Given the abundant liquidity in the banking sector, the repo rate could become the most efficient, and as such, the de facto easing was over 75 basis points, perhaps between 75 basis points base and 115 basis points, “wrote HSBC India chief economist Pranjul Bhandari and economist Aayushi Chaudhary in a note.
Chief Chartered Economist Standard Anubhuti Sahay called RBI’s decision “all that is necessary”, even if RBI could finance widening budget deficit by making large-scale OMO purchases of government bonds , given the gravity of the current situation.
The RBI told all banks, financial institutions and non-bank financial companies, including housing finance companies as well as microfinance companies, to “allow a three-month moratorium on payment of installments for all loans to current term as of March 1 “. , 2020. ”This applies to all term loans, including agricultural term loans, personal loans and crop loans.
This will not affect the credit history of customers, as banks will not treat it as a default when reporting to credit reporting companies (CIC), the Governor of the RBI said.
Similarly, in the case of loans to the working capital of companies, companies do not have to pay interest on all these facilities outstanding on March 1.
In any case, “interest will continue to accrue on the current portion of the term loans during the moratorium period,” said the RBI in a separate circular.
“It is a sigh of relief for businesses and an immediate effect is very helpful. Although they may not have achieved the desired amount of relief with this announcement, the failure to provide such relief could have been fatal, “said Abhishek Rastogi, partner, Khaitan & Co.
The RBI has injected rupees 3.744 billion in liquidity into the banking system through various policy measures. Given the recent liquidity measures, the infusion of liquidity represents an unprecedented amount of 6,500 billion rupees, or about 3.2% of the gross domestic product (GDP) of the economy.
To begin with, the central bank has announced that it will conduct targeted term repo auctions of up to three years for a total amount of up to Rs.1 trillion.
“The liquidity made available by the banks under the program must be deployed in high-quality corporate bonds, commercial paper and non-convertible debentures beyond the level of their investments in these bonds as of March 25, 2020” said the governor of the RBI. Eligible instruments include all kinds of corporate bonds, including mutual funds and NBFCs. RBI has stated that investments made under this program will in addition be allowed to be invested, and has given flexibility in how they are classified.
Corporate bond yields fell about 150 basis points after this announcement.
Although liquidity was plentiful in the system, it was very asymmetrical, said the RBI. As a result, the central bank reduced the cash reserve ratio (CRR) to 3% of the deposit base from 4% previously. This measure will generate liquidity of around 1.37 trillion rupees uniformly in the banking system. The requirement for a minimum daily maintenance of the CRR balance has also been reduced from 90% to 80%, as a one-off measure until June 26.
Even after these measures, if a bank has to borrow from the central bank, it can do so up to 3% (against 2% earlier) of its legal liquidity ratio (SLR) at 4.65%, against 5.4 % earlier under his emergency window called marginal permanent installation (MSF). The MSF rate is calculated at 25 basis points above the repo rate.
The RBI hoped that the additional borrowing facility would add an additional 1.37 trillion rupees to the “crisis” banking system at a reduced rate.
In a move that will have far-reaching implications for currency markets, the central bank said it would allow foreign branches of domestic banks to trade on the offshore undeliverable futures (NDF) markets to “improve efficiency price discovery. “
In reality, this may mean that the central bank will now intervene on the NDF market to control the exchange rate signal, even if the RBI is never expressed in its interventions. The central bank intervenes through a pocket of nationalized banks. Now it can have its influence even on unregulated foreign markets that operate from Dubai, New York, Singapore and Hong Kong.