27 MARCH 2020
In an unscheduled meeting on Friday (March 27th) the RBI announced a 75bps reduction in the repo rate (4-2 split decision) along with several other measures to enhance liquidity transmission in response to containing the impact of the Covid-19 spread.
Measures announced by the RBI:
Overall, these three liquidity measures (LTRO, CRR & MSF) are expected to release total additional liquidity of INR 3.74 lakh cr for the banking system. Citi analysts expect another repo rate cut of 25bps more in the June policy review and further OMO/primary auctions by the RBI. Today’s actions indicate the MPC’s willingness and to look through the near term inflation risk to support growth and financial stability, as per Citi analysts.
Given the RBI’s external benchmarking mandate, Citi analysts expect quicker pass through to lower lending rates. They expect the 10yr G-sec bond yields to grind lower towards 5.50% given lower policy rate, surplus liquidity and support from previously announced OMOs & LTROs.
Despite monetary easing, Citi analysts expect the INR to continue to outperform (vs other EM peers) due to lower oil prices and improved current account dynamics. Citi analysts expect these measures to help unfreeze credit channels, improve bank profitability and possibly reduce corporate bond spreads over G-secs.
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.