RBI's first big relief drug - fisdom

RBI’s first big relief drug

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“In spite of the very challenging environment, I remain optimistic. It is worthwhile bearing in mind that the macroeconomic fundamentals of the Indian economy are sound and, in fact, stronger than what they were in the aftermath of the global financial crisis – the fiscal deficit and the current account deficit are now much lower; inflation conditions are relatively benign; and financial volatility measured by change in stock prices from recent peaks and average daily change in the exchange rate of the rupee is distinctly lower. COVID-19 is upon us; but this too shall pass.”

~ Dr. Shaktikanta Das (Governor, Reserve Bank of India)

Key Announcements & Inferences:

1. Repo rate has been cut by 75 bps to 4.4%

Repo rate is the interest rate at which RBI lend money to banks. The reduction in repo rate means that the banks can borrow money from RBI at cheaper cost and will pass the benefit to their customers/borrowers by reducing the interest rate on their loans.

2. CRR rate has been reduced by 100 bps to 3% from 4% earlier

CRR is the percentage of available funds that banks must maintain with RBI as a statutory requirement. Reduction in CRR by 100 bps translates to lesser amount being deposited with the RBI & more cash available to banks. This is expected to improve the on-ground liquidity situation.

3. A three-month moratorium is announced on payment of installments of loans outstanding on March 1, 2020 along with letting lenders allow for a 3-month deferment of interest payable on working capital.

This is perhaps the most-welcomed move by small businesses & middle-class Indians. This deferment of loan & interest repayments offers strong relief and categorises a larger part of income to be utilized as consumable cash flow. Also, lenders are offered the option to recalculate working capital cycles or ease margins to support borrowers. In all these cases, there will be no impact on credit score (individuals) or asset quality (lenders).

4. RBI will conduct auctions of long-term repo operation (LTRO) of three-year tenure up-to Rs1 lakh crore at floating rate linked to policy rate

This initiative is expected to support the liquidity situation in debt markets. The move is expected to mobilise ~INR 3.74 Lakh Crore as additional liquidity. Mutual Funds are the biggest beneficiary of this relief since it lets them address panic redemption requests in a much better fashion.

Key Takeaway for Investors

In sync with Global Central Banks, the RBI is also working proactively towards supporting the economy through a wide array of tools ranging from conventional rate cuts to the much unconventional yet effective Long-Term Repo Operations. The RBI’s actions covering middle-class Indians and small, medium enterprises along with the Finance Ministry’s coordinated effort to support the economically challenged, together reflect India’s strong stance & action on supporting not just the health but also the wealth of India.

We believe this is only the beginning of support & relief measures announced and that Indians should focus on staying healthy while the economics are taken care of by the Reserve Bank of India & Ministry of Finance.

“The RBI will continue to remain vigilant and take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability. As I had stated earlier, all instruments – conventional and unconventional – are on the table.”

~ Shaktikanta Das – MPC Statement 27.03.2020

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