Monetary Policy Actions so far: GFC vs COVID-19

05 MAY 2020

  • Rates: The RBI had been on a rate-hiking cycle in 2008 and was able to provide 425bps reduction to the repo rate over a 7-month period post-GFC (eventually bringing repo rate from 9% to 4.75%). In contrast, RBI was on the last leg of a rate-cut cycle when the Covid-19 crisis hit. While the repo rate has already been reduced to 4.4% (reverse repo-rate at 3.75%), Citi analysts expect further 50bps of reduction by Jun20.
  • Banking System Liquidity: The RBI provided additional liquidity of ~INR 3.8tn (7% of GDP) through 400bps cut in CRR, reduction in SLR, term repo facility, export credit finance, etc. post-GFC.
  • While the banking system was already flush with surplus liquidity in the current period, RBI provided INR 3.7tn of additional liquidity through 100bps CRR cut, INR 1tn Targeted Long Term Repo Operations (TLTRO) and expansion of MSF window, taking total banking system liquidity to unprecedented levels of INR 7tn.
  • Special Liquidity Windows: Apart from an INR 60K cr borrowing window for Banks to lend to MFs and NBFCs, the RBI had also created Special Purpose Vehicles (SPVs) to invest in money-market securities issued by NBFCs, post the GFC. Further, INR 16K cr of special re-finance was provided to NHB, SIDBI and EXIM Bank to facilitate credit flow to housing, MSME and export sectors.
  • In the current period, RBI announced INR 50K cr of TLTROs for Banks to lend to NBFCs and INR 50K cr of special liquidity window for Banks to lend to MFs or purchase credit securities from them.
  • Regulatory Forbearance: Post the GFC, RBI cut bank’s provisioning requirement against all standard assets to 0.4%, while allowing reduced risk weights for NBFC/Corporate claims and special treatment for assets that had turned NPA due to GFC.
  • During the current crisis, the RBI has allowed a 3-month moratorium on term and working capital loans without any re-rating of the asset or borrower. Banks have however been mandated to maintain 10% higher provision on accounts that have availed moratorium.
  • External Sector: Focusing on measures to attract foreign capital post the Lehman crisis (INR had depreciated ~15% in 2 months), the RBI increased NRI deposit rates, eased foreign borrowing norms for Banks, NBFCs and corporates, relaxed External Commercial Borrowing (ECB) and export credit norms, introduced FX swap facility for banks and raised FPI limit for corporate bonds to USD 15bn (from USD 6bn earlier).
  • In the current period, apart from the USD 2bn FX Swap facility announced earlier and some forex market intervention, there has been comparatively less focus on external balances, given INR only depreciated 6% despite record FPI outflows of USD21bn.
  • Citi analysts expect RBI’s forex reserves to help keep INR within the 74-76/USD range, while benefits of expected current account surplus may play out only in the medium term.



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