RBI Policy: Unscheduled and Power Packed

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:

• Repo rate reduced by 75bp to 4.40% and Reverse repo reduced by 90bp to 4.00% – lowest ever repo rate for India. Monetary policy stance left unchanged as “accommodative”.
• CRR (Cash Reserve Ratio) reduced for banks by 100bps to 3% (resulting in INR 1.37 lakh cr of additional liquidity). Minimum daily CRR balance requirement reduced from 90% to 80% for the next 3 months.
• The RBI will conduct INR 1 lakh cr of Targeted Long Term Repo Operations (TLTRO) with a 3 year tenure. Banks are mandated to deploy these funds in investment grade corporate bonds, commercial papers (CP) and NCDs.
• Allowed banks to borrow upto 3% of SLR under the Marginal Standing Facility (MSF) window (increased from 2% earlier), resulting in additional liquidity release of INR 1.37 lakh cr.
• Implementation of the last tranche of the Capital Conservation Buffer postponed till 30^th Sep, 2020.
• To help retail and MSME borrowers most impacted by the lockdown, the RBI allowed a moratorium on term loans and deferment of interest payment on working capital loans for 3 months without any change in asset classification or impairment to the credit history of the borrower.

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.