RBI Policy: Incremental Push towards Liquidity Transmission

20 APRIL 2020

On 17th April 2020 the RBI announced another set of actions combining rates, liquidity and regulatory measures. While focusing on provision of liquidity to NBFC and SMEs, the RBI also tried to further dis-incentivise risk aversion by banks.

Key actions by the RBI:

  • Reverse repo rate reduced by 25bps to 3.75%, while Repo rate was left unchanged at 4.40%, to encourage flow of liquidity into credit instruments.
  • Liquidity Coverage Ratio (LCR) reduced to 80% from 100% to ease bank’s liquidity position. LCR to be restored back to 90% by Oct 1 2020 and 100% by Apr 1, 2021.
  • Time-period permitted for resolution of stressed assets increased by 90 days to 300 days.
  • INR 500bn of Targeted Long Term Repo Operations (TLTRO) announced, with funds to be parked in investment grade NBFC bonds and commercial papers only. 50% of the amount raised through this window to be deployed mandatorily with small/mid-sized NBFCs.
  • NBFCs (in addition to Banks) are now allowed to consider payment moratorium relief for their borrowers. NBFCs may also allow a 1-year moratorium on payments to real estate developers without affecting the asset classification.
  • Ways and Means borrowing limit raised by ~INR 200bn for State Governments to help ease immediate funding requirements. Refinancing offered to all-India financial institutions like NABARD, SIDBI and NHB.
  • To ensure stability in the financial system, the RBI mandated additional 10% provision against accounts which were granted moratorium by Banks/NBFCs. The 90-day NPA norm will exclude the moratorium period for such accounts.
  • Banks are also restricted from paying dividends from FY20 profits until further notice, in a move to conserve bank’s capital.
  • Source: Bloomberg, Citi Research

Following strong dovish guidance from the RBI governor, Citi analysts now expect a 50bps repo rate cut by Jun20 and see a possibility of the monetary policy review to be advanced to May20. Citi analysts expect the 10-yr G-sec bond yields to drift lower towards 5.75% (from 6.34 currently).

Fixed Income investors may continue to prefer high credit quality with short duration and remain diversified in their portfolios. Fixed Income Investors with higher risk appetite may also look at allocating to dynamic bond funds having high credit quality portfolios.

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