Coronavirus lockdown: Will RBI’s push sooth nerves?

Reserve Bank of India’s inter-policy announcement was an unexpected sequel to the monetary policy announcement in end-March. This shows that the central bank is taking cognizance of ground feedback and calibrating actions.

The measures announced in this latest edition from RBI hugely disincentivize banks further from parking money with RBI, indirectly forcing them to create credit. While we are amidst a lockdown with logistical limitations and amidst significant uncertainty and risk aversion, once we are through this tunnel it appears banks will have no choice but to aggressively create credit.

The announcement further provides funding for NBFCs and refinances sectors dependent on non-bank lending. The refinancing announcements and the second TLTRO put together bring about Rs 1 lakh crore of liquidity to be infused in addition to the Rs 1 lakh crore of liquidity seen under the first TLTRO.

The RBI is open-minded to throw whatever it takes at the imminent growth problems of the economy, as can be seen from the pronouncement on inflation with a mention that continued inflation easing in line with RBI expectations could open more policy space. While the markets expect a big bang on both the fiscal and the monetary, the government and the RBI appear to be delivering measures on an incremental yet calibrated basis; careful not to open all cards or waste any bullets in haste.

The RBI cut its reverse repo rate again by 25 basis points (bps) further to its previous cut of 40 bps, in the March-end policy meeting. This takes the reverse repo rate to 3.75% and the spread between reverse repo and repo rate at 4.4% to a significantly high 65 bps.

The amount absorbed under Reverse Repo operations stood at Rs 6.9 lakh crore as of 15th April. This has been rising consistently and is a sharp rise from Rs 3.5 lakh crore in March. This move is meant to make it imperative for banks to create credit instead of passing the funds back to RBI.

The NBFC sector has been in need of liquidity because on one side of the book there is a moratorium to their borrowers but on the other side, they have no moratorium from their lenders. RBI is launching a second TLTRO worth Rs 50,000 crore targeting NBFCs and MFIs. The last TLTRO saw funding deployment to PSUs and large corporates in primary issuances. Funds availed from this second TLTRO would need to be invested in investment-grade Commercial Papers and NCDs of NBFCs, with at least 50% of the amount availed under the facility to small and mid-size NBFCs and MFIs. This is a welcome move and clearly makes the point highlighted above of responding to ground realities.

The Ways and Means Advances to states have seen a 30% limit increase, taking the total rise from March 2020 to 60%.

Given the states’ strain on finances during this pandemic, the increased WMA limits help states with liquidity and avoid crowding of state level borrowings. The RBI announced Rs 50,000 in refinancing to NABARD, SIDBI, and NHB that are the key lenders to agriculture, rural, small industries, HFCs, NBFCs, and MFIs.

This is to provide liquidity addressing all NBFC segments in the economy. The RBI has also instructed SCBs and Cooperative banks to not make any further dividend pay-outs pertaining to FY20 in order to conserve capital. There is a temporary reduction in mandated liquidity coverage ratio from 100% to 80% for banks that would help them further preserve capital.

To sum up, RBIs responsiveness has been targeted and well calibrated which would ensure smoothing of frayed nerves and ward of systemic risks even as we prepare to cushion to the economy and enable it to bounce back.