Mumbai: To mitigate the impact of economic fallout on financial liquidity due to COVID-19 pandemic, the Reserve Bank of India on Friday announced a set of new measures including a reduction in reverse repo rate.
Accordingly, the rate now stands at 3.75 per cent of Liquidity Adjustment Facility (LAF). The reverse repo is an important monetary policy tool used by the Reserve Bank to control liquidity and inflation in the economy.
Under the Reverse Repo Rate, banks deposit excess funds with the RBI and ear interest for it. The move is expected to encourage banks to ease lending and investments into the economy.
Announcing the slew of measures via online channels, RBI Governor said that policy repo rate would for now be maintained at 4.4 per cent. Further, he announced other measures such as going in for TLTRO 2.0 and re-financing facilities for critical institutions.
Together these would mean an additional liquidity to the tune of Rs 1 lakh crore with Rs 50,000 crore as TLTRO 2.0 and Rs 50,000 crore refining support to NABARD, NHB and SIDBI.
In terms of liquidity infusion, Das said that RBI will conduct the round two of targeted long-term repo operation (TLTRO) worth Rs 50,000 crore. TLTRO is a loan scheme for banks which come at the current repo rate from the RBI.
This type of operation is generally conducted to relieve the banks from some of their debt repayment obligations towards bondholders. Thus, it boosts cash flows emanating from the banking sector.
"... It has been decided to conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of Rs.50,000 crore, to begin with, in tranches of appropriate sizes," he said.
"The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs."
Earlier, the Reserve Bank Governor had said that a fresh TLTRO will be conducted through which Rs 1 lakh crore would be injected through multiple tranches. Besides, RBI announced a 90-day extension for the resolution period for large stressed assets which have not been resolved within the 210-day deadline as per the central bank's June 7, 2019 order.
The RBI Governor also said that NPA classification will exclude the moratorium period. Moreover, in order to ease the liquidity position, the LCR requirement for Banks is being brought down from 100 per cent to 80 per cent with immediate effect.
"The requirement shall be gradually restored back in two phases a 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021," he said.
The apex bank prohibited commercial and cooperative banks from making any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions.
Furthermore, the RBI hinted at further cuts in interest rates to maintain adequate liquidity in the system and counter the intensification of risks to growth and financial stability brought on by COVID-19.
Das said that easing of inflationary pressure on the economy and the outlook that it is on a declining trajectory and could fall further "make policy space available to address the intensification of risks to growth and financial stability brought on by COVID-19."
Early developments suggest that inflation is on a declining trajectory, having fallen by 170 basis points from its January 2020 peak.
In the period ahead, inflation could recede even further, barring supply disruption shocks and may even settle well below the target of 4 per cent by the second half of 2020-21, Das said while unveiling second instalment of measures aimed at providing liquidity in the economy and allow credit flows to grow.
"Such an outlook would make policy space available to address the intensification of risks to growth and financial stability brought on by COVID-19. This space needs to be used effectively and in time", he added.
The RBI Governor said that the bank will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic.
Read: COVID-19 Causes Severe Disruption To Indian Economy, Says World Bank
"The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable," Das said
In addition, the RBI Governor cited the IMF projections that has put India among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent) in 2020.
In fact, this is the highest growth rate among the G-20 economies, Das said that this comes even as the global economy is expected to plunge into the worst recession since the Great Depression, far worse than the global financial crisis.
For 2021, the IMF projects sizable V-shaped recoveries: close to 9 percentage points for the global GDP. India is expected to post a sharp turnaround and resume its pre-COVID pre-slowdown trajectory by growing at 7.4 per cent in 2021-22, he said.
Meanwhile, India Inc welcomed the RBI decisions.
Industry body Assocham's Secretary General Deepak Sood said RBI's several relief measures should help the NBFCs, Housing Finance Companies, small businesses and above all considerably avert the risk of further NPAs.
"The fact that the NPA re-classification norms giving more time to the stressed loans to remain 'standard' are accompanied by the need for higher provisioning by banks shows the prudence path followed by the RBI. Higher provisioning would provide a long-term stability and higher protection to the banks," Sood was quoted as saying in a statement.
According to Mohit Singla Chairman of Trade Promotion Council of India: "Rs 50,000 crore special finance facility provided to financial institutions such as NABARD, SIDBI and NHB will surely help the rural economy which is stressed for funds due to the crisis."
"Additional steps like; 90-day NPA norm not to apply on to the moratorium granted on the existing loans by banks, lowering the reverse repo rate and LCR requirement of banks brought down to 80 percent from 100 per cent, will surely ease pressure on the banking system."
Furthermore, the BSE Sensex soared over 986 points on Friday after RBI's second batch of stimulus measures lifted sentiment amid the coronavirus gloom.
After starting over 1,116 points higher, the 30-share BSE Sensex pared some early gains to end 986.11 points or 3.22 per cent higher at 31,588.72.
Similarly, the NSE Nifty zoomed 273.95 points, or 3.03 per cent, to finish at 9,266.75.
Axis Bank was the top gainer in the Sensex pack, surging 13.45 per cent, followed by ICICI Bank (9.89 per cent), IndusInd Bank (9.13 per cent), Maruti (7.36 per cent), TCS (5.32 per cent), Kotak Bank (4.96 per cent)and Reliance Industries (4.86 per cent).
On the other hand, Nestle India, HUL, Tech Mahindra and Sun Pharma ended in the red, shedding up to 3.15 per cent.
Interest rate-sensitive banking, financial, auto and realty indices on the BSE settled up to 6.83 per cent higher.
In his second televised address since the nationwide lockdown began on March 25, Reserve Bank of India (RBI) Governor Shaktikanta Das pledged to boost liquidity and expand bank credit.
Meanwhile, the Indian rupee appreciated by 45 paise to 76.42 against the US dollar in intra-day trade on Friday after Reserve Bank of India Governor Shaktikanta Das announced measures to ensure adequate liquidity in the system to ease the financial stress caused by the Covid-19 pandemic.
Forex traders said positive domestic equities and weakening of the American currency in overseas also supported the rupee.
At the interbank foreign exchange, the rupee opened at 76.59, and then gained further ground and touched a high of 76.42 against the US dollar, registering a rise of 45 paise over its previous close.
On Thursday, rupee had settled at an all-time low of 76.87 against the US dollar.
Also Read: India Fights Corona: RBI Announces EMI Breather, Injects Rs 3.7L Cr Liquidity
The central bank reduced the reverse repo rate - the rate at which banks park their fund with the central bank - by 25 basis points to 3.75 per cent.
This will encourage banks to lend to the productive sectors of the economy.
With regard to other measures, Das said RBI will begin with giving an additional Rs 50,000 crore through targeted long-term repo operation (TLTRO) to be undertaken in tranches.
Besides, he announced a re-financing window of Rs 50,000 crore for financial institutions like Nabard, National Housing Bank and Sidbi.
The combination of measures to boost liquidity, improve monetary transmission and relax repayment schedules is the need of the hour in which RBI has been proactive and repeatedly insisting that they would do whatever it takes.
"Of course this provides much-needed liquidity and positive message for NBFC especially and a much-elaborated stimulus package is awaited," said Abhishek Goenka, Founder & CEO, IFA Global.
The measures undertaken by the RBI boosted investor sentiment. However, there are concerns over the impact of coronavirus outbreak on the domestic as well as the global economy.
The number of cases around the world linked to the new coronavirus has crossed over 21 lakh. In India, over 13,000 coronavirus cases have been reported so far.
Meanwhile, domestic bourses were trading on a positive note on Friday with benchmark indices Sensex trading 595.79 points higher at 31,198.40 and Nifty up by 169.45 points at 9,162.25.
Foreign institutional investors (FIIs) remained net sellers in the capital market, as they sold equity shares worth Rs 2,920.36 crore on Thursday, according to provisional exchange data.
Brent crude futures, the global oil benchmark, rose 2.05 percent to USD 28.39 per barrel.
Meanwhile, the dollar index, which gauges the greenback's strength against the basket of six currencies was trading 0.24 percent lower at 99.78.
(With agency inputs)