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From rate cuts to liquidity measures, RBI goes all guns blazing: 8 key takeaways from RBI policy

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The Reserve Bank of India (RBI) announced a huge 75 basis points rate cut on March 27, bringing it to 4.40 percent from 5.15 percent.

Announcing a series of measures to ensure liquidity and stability in the country’s financial system as India battles coronavirus, the Reserve Bank of India (RBI) governor Shaktikanta Das said the monetary policy committee (MPC) met almost a week ahead of the scheduled date.

“This decision of the rate cut and the advancement of MPC have been warranted by the disruptive force of COVID-19. It is intended to mitigate the negative effects of the virus, to revive growth and to preserve financial stability,” Das said.

The RBI slashed repo rate by 75 bps to 4.40 percent while the reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF), was reduced by 90 bps to 4 percent.

“The purpose of this measure, relating to reverse repo is to make it relatively unattractive for the banks to passively deposit the funds with the RBI and instead to use these funds to lending to the productive sectors of the economy,” Das said.

Growth outlook uncertain

The RBI said that the coronavirus pandemic will affect the growth of most sectors.

“Apart from continuing resilience from agriculture and allied sectors, most sectors of the economy will be adversely impacted by COVID-19, depending upon its intensity, spread and duration,” Das said, referring to the illness caused by the virus.

“Projections of growth and inflation would be heavily contingent on the intensity, spread and duration of COVID-19. The MPC has refrained from giving out specific growth and inflation numbers because the situation is changing and the outlook is uncertain.”

There is a rising probability that a large part of the global economy will slip into recession. Turning to growth in India, the 5 percent growth expectation is at risk, the RBI governor said.

Liquidity measures

“Large selloffs in markets have intensified redemption pressure. The RBI will conduct auctions of long-term repo operation (LTRO) of up to three-year tenure of appropriate sizes for a total amount up to Rs 1 lakh crore at a floating rate linked to the policy repo rate,” Das said.

The RBI governor emphasised that the liquidity availed by banks under the scheme has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures, over and above, the outstanding level of those investments in these bonds, as on March 25, 2020.

Eligible instruments comprise both primary market issuances as well as secondary market purchases, including from MFs and NBFCs.

“Investments made by the banks under this facility will be classified as held-to-maturity (HTM) even in excess of 25 percent of the total investment permitted to be included in HTM portfolio,” Das said.

Exposure under this facility will also be not recognised under the large-exposure framework.

The first auction of Rs 25,000 crore, under this arrangement, will be conducted later on March 27.

CRR reduced by 100 bps

The RBI said that despite ample liquidity in the system, its distribution was highly asymmetrical.

“To help banks tide over the disruption caused by COVID-19, it has been decided to reduce the cash-reserve-ratio (CRR) of all banks by 100 bps to 3 percent of net demand and time liabilities (NDTL) with effect from March 28 for a period of one year,” Das said.

This reduction would release primary liquidity of about Rs 1.37 lakh crore uniformly across the banking system in proportion to liabilities of the constituents rather than in relation to their holding of excess SLR.

The RBI also reduced the minimum daily CRR balance from 90 percent to 80 percent, effective March 28. This is a one-time dispensation available up to June 26, 2020.

The RBI increased the accommodation under the marginal standing facility (MSF) from 2 percent of the statutory liquidity ratio (SLR) to 3 percent with immediate effect. This measure will be applicable up to June 30, 2020 and it should provide comfort to the banking system by allowing it to avail an additional Rs 1.37 lakh crore of liquidity under the LAF window.

These measures will inject a liquidity of 3.74 lakh crore in the system.

Widening monetary policy rate corridor

The  RBI also decided to widen the monetary policy rate corridor.

"In view of persistent excess liquidity, it has been decided to widen the existing policy rate corridor from 50 bps to 65 bps. Under the new corridor, the reverse repo rate under the LAF would be 40 bps lower than the policy repo rate against the existing 25 bps. The marginal standing facility rate would continue to be 25 bps above the policy rates,” Das said.

Moratorium on term loans

All lending institutions have been permitted a three-month moratorium on payments of instalments of all term loans outstanding as of March 1, 2020.

Deferment of interest on working capital facilities

Lending institutions can defer by three months payment of interest outstanding as on March 1 on working capital facilities sanctioned in the form of cash-credit and overdraft and such. The accumulated interest for the period will be paid at the end of the deferment period.

The moratorium on term loans and the deferment of interest on working capital will not result in asset classification downgrade, the RBI governor said.

Easing of working capital financing

In respect of working capital facilities sanctioned in the form of cash credit, overdraft, lending institutions are allowed to recalculate drawing power by reducing margins or by reassessing the working capital cycle for borrowers.

More to come?

The RBI governor said the central bank was closely monitoring the situation and will step in whenever required.

“Let me assure you that the RBI is at work in mission mode. We have been monitoring the evolving financial market and the macroeconomic conditions and calibrating its operations to meet any need for additional liquidity support as well as to take other measures if warranted,” said the RBI governor.