Seventh Bi-monthly Monetary Policy Statement, 2019-20 – Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India

A day after Modi govt began its economy rescue in right earnest with announcement of Rs 1.70 lakh crore coronavirus package, the Reserve Bank of India joined the big fight today with a host of measures aimed at minimising the damage from Covid-19. Make no mistake, it is a fight never seen before, Das warned while outlining the risks to Indian economy'

These measures come just hours after Moody's Investors Service cut India's growth forecasts for 2020 calendar year to 2.5% from 5.3%. A rate cut by the Reserve Bank of India (RBI) was much expected this time and the Governor did not disappoint. The aggressive cut of 75 basis points (bps) in the repo rate is commendable, as it provides the balm required to revive the economy. This is evidently meant to counter the negative impact of the coronavirus (Covid-19) pandemic.

Governor Shaktikanta Das was very prudent in not giving a forecast for growth or inflation because, as he rightly stated, with things changing so fast, it is not certain how long the threat will last and how its spread and depth will impact the economy. Therefore, the policy is directed towards the immediate problem of mitigating the damage caused by the virus.

The RBI governor informed that the members of the MPC met on March 24, 26, and 27. On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (March 27, 2020) decided to:

• reduce the policy repo rate under the liquidity adjustment facility (LAF) by 75 basis points to 4.40 per cent from 5.15 per cent with immediate effect (Repo rate is the rate at which a country’s central bank lends money to commercial banks, and reverse repo rate is the rate at which it borrows from them);
• accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.65 per cent from 5.40 per cent;
• further, consequent upon the widening of the LAF corridor as detailed in the Statement on Developmental and Regulatory Polices, the reverse repo rate under the LAF stands reduced by 90 basis points to 4.0 per cent creating an asymmetrical corridor.
• The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy, while ensuring that inflation remains within the target.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

- Cash Reserve Ratio (CRR) has been slashed by 100 bps to 3 per cent.

Key takeaways from RBI's monetary policy meet:

1. Repo rate cut:The 75 basis point cut (One basis point is a hundredth of a percentage point) in repo rate is a powerful signal no doubt, aimed at lowering the cost of funds. Problem is it is of limited use in the lockdown. Yet, the interest on floating rate housing loans will come down, helping household cash flow.

2. Cut in cash reserve ratio:The 100 basis point cut in cash reserve ratio (CRR) means more money with banks, especially private sector banks. Some of them had to access the wholesale funding markets, making CD rates go up. Greater access to MSF (Marginal Standing Facility) will also give banks more access to funds. The move will ensure financial stability.

3. Forbearance:Moratorium on payment of instalments on term loans will help people to postpone payment of EMIs and help their cash position. This will support cash flows of firms too. The same goes for deferment of interest on working capital loans.

4. Liquidity in money markets:Money markets were facing pressures from redemptions by mutual funds. The Targeted Long-term Refinancing Operations (TLTRO) will give cash to banks, which they are supposed to invest in investment-grade bonds, commercial paper etc. This will be reassuring for the money markets, ensuring they don’t seize up.

5. Forward guidance: The RBI governor’s statement that ‘whatever steps are necessary—all instruments, conventional and unconventional are on the table’, raises the hope that further steps will be taken down the road, if problems persist.
6. The RBI said it was maintaining its "accommodative" stance, and would maintain its position "as long as necessary" to revive growth, while ensuring inflation remained within target.

Liquidity Management -
These three measures relating to TLTRO, CRR and MSF will inject a total liquidity of ₹ 3.74 lakh crore to the system.

1. Targeted Long Term Repos Operations (TLTROs):

Reserve Bank will conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to ₹ 1,00,000 crore at a floating rate linked to the policy repo rate. Liquidity availed under the scheme by banks has to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020. The first TLTRO auction will be held today (March 27, 2020).

2. Cash Reserve Ratio:

a)Reduction of Cash Reserve Ratio (CRR) of all banks by 100 basis points to 3.0 per cent of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28, 2020. This reduction in the CRR would release primary liquidity of about ₹ 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR. This dispensation will be available for a period of one year ending on March 26, 2021.

b) To reduce the requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per cent effective from the first day of the reporting fortnight beginning March 28, 2020. This is a one-time dispensation available up to June 26, 2020.

3. Marginal Standing Facility: Under the marginal standing facility (MSF), banks can borrow overnight at their discretion by dipping up to 2 per cent into the Statutory Liquidity Ratio (SLR). In view of the exceptionally high volatility in domestic financial markets which bring in phases of liquidity stress and to provide comfort to the banking system, RBI decided to increase the limit of 2 per cent to 3 per cent with immediate effect. This measure will be applicable up to June 30, 2020. This is intended to provide comfort to the banking system by allowing it to avail an additional ₹ 1,37,000 crore of liquidity under the LAF window in times of stress at the reduced MSF rate announced in the MPC’s resolution.

Widening of the Monetary Policy Rate Corridor : RBI decided to widen the existing policy rate corridor from 50 bps to 65 bps. Under the new corridor, the reverse repo rate under the liquidity adjustment facility (LAF) would be 40 bps lower than the policy repo rate. The marginal standing facility (MSF) rate would continue to be 25 bps above the policy repo rate.

Regulation and Supervision:
-Moratorium on Term Loans - The Reserve Bank today permitted banks, NBFCs (including housing finance companies) and other financial institutions to allow a three-month moratorium on payment of installments on term loans outstanding as on March 1, 2020, in view of the disruption caused the coronavirus outbreak. Deferment will not impact credit history of the borrower.
-Deferment of Interest on Working Capital Facilities
-Easing of Working Capital Financing
-Deferment of Implementation of Net Stable Funding Ratio (NSFR)
-Deferment of Last Tranche of Capital Conservation Buffer

Financial Markets-
Permitting Banks to Deal in Offshore Non-Deliverable Rupee Derivative Markets (Offshore NDF Rupee Market)

RBI Governor Shaktikanta Das's address:

-RBI has last reduced CRR on February, 2013, by 25 basis points.
-Rupee rallies 81 paise to 74.35 against USD after RBI announced various measures to support economy.
-Macroeconomic fundamental stronger than those in aftermath of 2008 financial market crisis
-RBI to undertake repo operation of up to ₹1 lakh crore to infuse liquidity into market
-Moratorium on term loan, deferring of interest on working capital will not classify as default, not to impact credit history of borrower.
-Funds at banks safe. No need for panic withdrawal
-Fallacious to link share prices with safety of deposits
-RBI will continue to remain vigilant and take whatever steps are required to mitigate the impact of Covid-19
- ₹2.8 lakh crore liquidity measures taken.
-Financial markets are under stress; require steps by central bank for market stability and revival of economic growth.
-NSFAR implementation deferred by 6 months
-All banks and NBFCs are being permitted to allow a 3-month moratorium on payment of term loans
-Outlook highly uncertain and negative in view of outbreak of Covid-19
-Monetary policy committee refrains from giving out growth, inflation outlook for coming fiscal on uncertain outlook
-Food prices may soften further on back of record foodgrain production.
-The outlook is now heavily contingent upon the intensity, spread & duration of the pandemic. There is a rising probability that large parts of the world will slip into recession
-MPC noted that global economic activity has come to a near stand-still as COVID-19 related lockdowns and social distancing in affected countries. Expectations of a shallow recovery in 2020 from 2019's decade low in global growth have been dashed
-CRR (cash reserve ratio) of all banks to be cut by 100 bps to 3%
-RBI is calibrating action to meet any liquidity mode
-Living in extraordinary situation; war effort needs to be mounted against coronavirus using conventional, unconventional tools
-Time has now come for the RBI to launch an array of arsenals to mitigate the impact of Covid-19
-Finance is the lifeline of the economy
-Strong fiscal measures are critical
-Slump in crude oil prices could provide some relief
-Monetary policy committee voted 4:2 majority
-Reverse repo-rate reduced by 90 basis points to 4%
-Das said the MPC has decided to cut the repo rate by 75 basis points to 4.4%.
-MPC voted for rate cut.
-This address comes under extraordinary circumstances: Das

All members voted for a reduction in the policy repo rate and maintaining the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.

Dr. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted for a 75 bps reduction in the policy repo rate. Dr. Chetan Ghate and Dr. Pami Dua voted for a 50 bps reduction in the policy repo rate.

The minutes of the MPC’s meeting will be published by April 13, 2020.

For a full read please click on the following links: Governor’s Statement - Seventh Bi-monthly Monetary Policy Statement, 2019-20, March 27, 2020 &  Seventh Bi-monthly Monetary Policy Statement, 2019-20 Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India 

Impact of Monetary Policy Announcement on the Banks and Borrowers:

(Article by Radhika Merwin  BL Research Bureau | Updated on March 27, 2020  Published on March 27, 2020)
RBI slashes repo rate and unleashes other tools to tackle COVID. What does it mean to banks and borrowers?

Rate action

The first in the series of policy measures announced by the RBI was the 75-basis-point reduction in policy repo rate to 4.4 per cent. This is a substantial cut and huge boost to sentiments. While this could lead to sharp cuts in lending rates, the pace and quantum of transmission would vary across banks.

Remember the 135-basis-point reduction in policy repo rate through 2019 resulted in a 60-bps reduction in lending rates (for fresh loans), indicative of the challenges in the transmission.

But more importantly, with the Covid-19 impact on businesses likely to be massive and long-drawn, the risk aversion of banks to lending is also expected to go up significantly. And hence, banks may be selective in their lending. On the borrowers front too, appetite for fresh loans may remain weak and hence, the benefit on lower lending rate on fresh loans may not be that significant at this juncture. However, the sharp cut in repo rate is a strong sentiment booster for the economy, grappling with the Covid-19 crisis.

Aside from the cut in repo rate, the RBI has also widened the policy rate corridor, by reducing reverse repo rate by 90 bps to 4 per cent (as against 75 bps in repo rate). Reverse repo rate is the rate at which banks lend short-term funds to the RBI. The idea to reduce the reverse repo rate at a much sharper quantum than the repo rate is to dis-incentivise banks to park their excess funds with the RBI.

What for banks: The overall credit growth of the banking system currently is at a muted 3 per cent. This reflects the weak demand and growing risk aversion of banks. A sharp cut in lending rates amid weak credit growth could add pressure on banks’ net interest margin. As such, cost increase on account of tacking the Covid-19 crisis, waiving off of various fees and charges on digital transactions and maintaining of minimum balance ,etc., could also hurt margins.

The reduction in reverse repo rate by 90 bps to 4 per cent may dissuade banks to park money under reverse repo (given that banks offer 3.5-4 per cent on savings deposits). However, given that banks would remain wary of lending to stressed sectors and companies, the RBI’s move may not necessarily prompt banks to scale up lending significantly. In March, banks have parked ₹3-lakh crore under reverse repo on daily average basis, which is indicative of the excess liquidity with banks.

What for borrowers: Banks had introduced repo-linked loans from October last year. Borrowers whose loans are linked to repo will see the reduction in repo passed on to them in the coming months (the RBI has mandated that loans are reset at least once in three months). For old borrowers (pre-MCLR regime or pre-repo-linked loans), fall in lending rates would depend on each banks’ action. One-year MCLR has fallen by about 50 bps since January last year.

While some banks may offer attractive deals to good borrowers, it may be important to exercise caution. Retail borrowers should not over-leverage themselves at this point. With the ramifications of Covid-19 on jobs and incomes uncertain, borrowers should only go for loans on need basis.

Liquidity measures

The RBI also announced various liquidity measures.

One, the RBI has announced targeted long-term repo (TLTRO) of ₹1-lakh crore of three-year tenure, at a floating rate linked to the policy repo rate. The RBI has been providing long-term funds under LTROs since February. What is different now is that the rate at which these funds will be provided will not be fixed at the repo rate. It will be a variable rate linked to repo, which means that the rate will vary depending on the demand from banks for these funds. Hence, the cost could be higher than the repo rate of 4.4 per cent.

Two, banks will have to deploy these funds in investment grade (BBB rated and above) corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020. Hence, banks do not have the leeway to deploy these funds for other purposes (like stocking up on government bonds).

Three, such investments will be classified as held to maturity (HTM). This means that banks need not mark-to-market these investments at the end of every quarter. This is welcome, as banks would otherwise have been wary to invest in these bonds, fearing treasury losses on account of rising yields (owing to increase in risk perception).

The RBI has also reduced the cash reserve ratio ― amount of cash banks need to keep with the RBI — to 3 per cent from 4 per cent. It has also allowed banks to dip into their SLR (portion of deposits held in government securities) to the extent of 3 per cent (from 2 per cent) under the marginal standing facility (MSF). This means that banks can borrow an additional ₹1.37-lakh crore at the MSF rate of 4.65 per cent.

What for banks: The measures to infuse additional liquidity into the banking system will help banks ease their funding needs. However, to what extent banks use the additional liquidity will depend on each banks’ needs and appetite for lending. For instance, in case of TLTRO, while the HTM leeway will induce banks to invest in specific corporate bonds, the extent of borrowing will depend on each bank. As such, the demand for LTROs has been waning (read my story on https://www.thehindubusinessline.com/portfolio/news-analysis/why-rbis-latest-ltro-auction-saw-weak-response/article31106587.ece), implying limited options with banks to deploy the funds. However, PSU banks may be nudged by the Centre to buy corporate bonds. Similarly, the additional liquidity under CRR and MSF will also be utilised selectively by banks.

What for borrowers: For the high-rated corporates, the TLTRO move is a big positive, as it will ease up funding issues to an extent. However, for the more vulnerable segments and sector (BBB and below rated companies), the pain could continue as banks would be wary of lending to them. Sectors such as aviation, can continue to find it difficult to raise funds.

Moratorium relief

As was widely expected, the RBI has provided three-month moratorium on payment of instalments on terms loans (outstanding as on March 1). It has also allowed deferment of interest of three months on working capital facilities. It has allowed lenders to re-assess the working capital needs of corporates and extend credit facilities if need be.

Changes in terms and conditions of the term loans or working capital facilities will not result in asset classification downgrade. These will be available to all commercial banks, co-operative banks, financial institutions, and NBFCs (including housing finance companies and micro-finance institutions).

What for banks: This is a huge respite for banks, as the Covid-19 impact is expected to be widespread leading to rise in defaults and hence, NPAs. The blanket forbearance for all term loans and working capital facilities, will help all lenders to cap their losses and erosion in capital. However, given that the Covid-19 impact is expected to extend beyond three months, banks could face increased stress after the moratorium is lifted. Hence, fiscal measures by the Centre to ease the pain will be critical. Also, the accumulated deferred interest payment for working capital will have to be paid after three months. If the pain for corporates does not ease, then paying the accumulated interest will be a tough task, leading to stress for banks.

What for borrowers: All borrowers with term loans, including retail borrowers with home loans and personal, will likely get the benefit of the moratorium. Hence, your EMIs on these loans may get a three-month respite. While more clarity is awaited from bankers on this, it appears that credit cards will not be covered under the moratorium. Clarity is also awaited on the procedural aspects, as borrowers usually give an ECS mandate on EMI payment. Banks could auto-provide the moratorium (else getting approval from each borrower on the changed terms and conditions would be difficult).

What the Experts say:

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

"In many ways the RBI’s measures went beyond the market’s expectation, particularly the magnitude of the policy rate cut and the CRR reduction.

"The fact that unlike the ECB or the Fed, the RBI did not announce direct purchases of corporate bonds, leaving it to the banks instead, could be bothering markets. Besides there are no sectoral facilities for the worst hit like aviation, hospitality etc."

ADITI NAYAR, PRINCIPAL ECONOMIST, ICRA, GURUGRAM

"The combination of moratoriums, liquidity enhancing measures and the sharper-than-hoped-for repo rate cut will help to assuage the markets in these increasingly unsettled times, and offer some protection against widespread defaults, even though the actual impact on boosting economic activity may be limited.

"Regardless of the measures announced now by the RBI, we are lowering our base case scenario for GDP growth to -4.5% for Q1 FY2021 and to 2.0% for FY2021, in light of the rapidly growing uncertainties over the duration of the impact of the coronavirus on economic activity in India and the rest of the world."

This is certainly positive for the yield curve and the March-quarter results of financial entities. But we also need to remember that currently demand for credit is too weak because of the economy-wide shutdown.

Hence, the RBI will be required to act aggressively later also when demand would start reviving. A refinance window for mutual funds is also a need of the hour, but there is no announcement to that effect.

RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE

"The central bank pulled all the stops, delivering an aggressive rate cut magnified by widening the liquidity adjustment facility corridor and cash reserve ratio (CRR) reduction.

"Other notable measures included providing moratorium on loans, deferment in interest payments, liquidity push through the CRR and minimum CRR changes and in totality lowering cost of funds while lowering incremental capital burden on banks."

"Markets cheered the steps, demonstrated by the sharp correction in 10Y GSec yields and rupee gains. These moves provide the right tailwind for the economy once the lockdown is complete. More bond purchases are likely as the fiscal strain on the government becomes clearer."

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"We think an emergency situation deserved emergency response and the RBI did the right thing by bringing forward its rate decision by a week when central banks all over the world are taking proactive measures."

"What is comforting though (and not unexpected) is the assurance that the RBI is open to all conventional and non-conventional monetary policy action, if required, especially if COVID-19 challenge persists longer."

RAHUL BAJORIA, CHIEF INDIA ECONOMIST, BARCLAYS, MUMBAI

"The RBI surpassed expectations by delivering more than what the market had anticipated, and its promise to do whatever it takes’ has come good. The steps to ease working capital pain, reduce liquidity costs and provide moratorium on term loans will alleviate stress across various sectors. We continue to see rates dropping to 3.50% by August 2020."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

"The RBI has pulled out its bazooka. It has pulled down the cost of capital through deep policy rate cuts, it has increased the quantity of money through CRR cuts and asset purchases, and more importantly reduced financial stress in the economy through its 3-month moratorium on all term loans as well as working capital."

"We think the additional liquidity and the reduction in financial stress will be immediately felt by the economy, while lower cost of capital will provide the necessary tailwind as we get out of the crisis."

Source: rbi.org.in , Business line, Economic Times, Business Today, Financial Express, LivMint, India Today & Money Control.