The Reserve Bank of India (RBI) has launched a series of measures to help the economy weather the current crisis. He launched targeted long-term repo operations (TLTRO) 2.0 of Rs 50,000 crore. Banks would be required to deploy at least 50% of the funds made available under this facility in bonds of small non-bank finance companies (NBFC) and microfinance institutions (MFIs).
This decision aims to reduce the funds channeled only to the top NBFCs and to ensure a more equitable distribution of cash. This decision had an immediate impact. Commercial paper (CP) and short-term corporate bond yields (two to three years) are 30 to 40 times lower (bp) than Thursday.
Offering additional relief to banks, the RBI has reduced the liquidity coverage ratio (LCR) that banks are required to meet to 80%, down from 100%. With this, banks can now also divert these funds from high quality liquid assets. Additionally, it increased the WMA limit for states to 60%. This will reduce the supply of SDL in the short term and help cool yields. SDL 10-year yields are down almost 20 basis points.
The RBI has also relaxed the non-performing asset classification (NPA) standards for NBFCs. He prevented the banks from paying new dividends for the financial year 20. He announced financing lines for NABARD, SIDBI and NHB up to Rs 25,000 crore, Rs 15,000 crore and Rs 10,000 crore, respectively at repo rates so that these institutions can also lend at more competitive rates, thereby ensuring transmission.
Another reduction of the reverse repo by 25 basis points to 3.75% aims to dissuade banks from stationing funds with the RBI and to encourage them to lend to the real economy. The combination of measures to increase liquidity, improve monetary transmission, and ease repayment schedules is the need of the hour that RBI was proactive and repeatedly insisted on doing whatever it took. Of course, this provides much needed liquidity and a positive message, especially for the NBFCs, and a very elaborate stimulus package is expected.
The rupee did not react much to the measures announced because it was rather a short-term liquidity measure, which the markets expected from the RBI. The shares, also, sold after the announcement. The US dollar (USD) is continuously seen on offer, recently due to the sale of corporate bonds and the REIT outflows seen in debt and stocks. Custodian banks recently bought the US dollar. NDF spreads have cooled a little but the pressure on the currency is still noticeable. In addition, many futures contracts are canceled by companies that have been unable to deliver documents against their exports.
We are still not out of the woods in the face of the global pandemic and emerging market currencies like the rupee may not find buyers at least in the short term. Another depreciation of 3 to 4% of the rupee cannot be excluded, at least in the short or medium term, which, according to some buyers, will benefit from being deferred by selling the dollar against the rupee, or about 4% for one year.
Abhishek Goenka is founder and CEO of IFA Global. The views are personal.