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Published on 30/03/2020 6:49:31 PM | Source: YES Bank

COVID-19 Policy Response: All guns blazing - YES Bank

Posted in Economy News| #Yes Bank Ltd #Economy

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COVID-19 Policy Response: All guns blazing

The global and Indian economy is currently facing an unprecedented degree of known-unknown risk from the COVID-19 pandemic. With the healthcare emergency metamorphosing into an economic and financial crisis, policymakers across the globe have announced large scale stimulus encompassing various markets and economic agents. In case of India, the central government unveiled INR 1.7 trillion relief package on Mar 26, 2020, which aims to provide a buffer for consumption demand while also easing administrative steps for a host of production related activities. This is besides the series of steps taken by various state governments to contain the economic fallout from the spread of COVID-19 (please see below for details).

Policy stimulus got a further boost today with the Reserve Bank of India announcing a series of steps to address recent tightness in overall financial conditions and emerging downside risks to growth:

 

Interest Rate

* To begin with, the central bank brought ahead its scheduled MPC review on Apr 3, 2020. In an emergency meeting, the MPC voted for a 75 bps cut in the repo rate (highest single day move post the Global Financial Crisis policy response) with immediate effect. As such, the repo rate now stands adjusted at 4.40% from 5.15% earlier. The committee also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy.

 

Liquidity

* The RBI introduced targeted term repo operations (TLTROs) in its toolkit after the introduction of FX Swaps and LTROs earlier in the year. The central bank would conduct INR 1 trillion TLTROs with a 3-year maturity at a floating rate linked to the repo rate. Liquidity availed by banks under this scheme will have to be deployed in investment grade corporate bonds, CPs, and NCDs in primary and secondary market in equal proportion. This we believe would help in compressing the currently elevated credit spreads (see chart below).

* The CRR saw its first cut since the Global Financial Crisis with the reserve ratio slashed by 100 bps to 3.00% of banks NDTL. This measure would be effective between Mar 28, 2020 and Mar 26, 2021 and would release primary liquidity worth INR 1.37 trillion into the banking system. Further, taking into account the operational hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements, the requirement of minimum daily CRR balance maintenance was reduced from 90% to 80% effective from March 28, 2020 until Jun 26, 2020.

* Banks will now be allowed a higher dispensation of 3% borrowing under the MSF window vis-à-vis 2% currently. This will be effective immediately until Jun 30, 2020. This is intended to provide additional comfort to the banking system by allowing it to avail an additional INR 1.37 trillion of liquidity under the LAF window in times of stress at the MSF rate.

* In view of current surplus money market liquidity, the central bank decided to widen the existing policy rate corridor from 50 bps to 65 bps. Under the new corridor, the reverse repo rate under the LAF would be 40 bps lower than the policy repo rate. The MSF rate would continue to be 25 bps above the policy repo rate.

 

Forbearance and Market Volatility

* The RBI has now permitted a moratorium of 3-months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans could get shifted across the board by three months.

* On similar lines, the RBI also permitted a deferment of 3-months on payment of interest in respect of working capital facilities (outstanding as on Mar 1, 2020). The accumulated interest for the period will be paid after the expiry of the deferment period. In addition, the central bank also allowed lenders to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes in credit terms permitted to the borrowers to specifically tide over the economic fallout from COVID-19 will not be treated as concessions granted due to financial difficulties of the borrower, and consequently, will not result in asset classification downgrade.

* The implementation of NSFR for banks under the recommendations of the Basel Committee has now been deferred from Apr 1, 2020 to Oct 1, 2020. In a similar vein, the implementation of last tranche of CCB under Basel standards has been deferred from Mar 31, 2020 to Sep 30, 2020.

* In a bid to widen the market structure and curb volatility in rupee derivatives, the RBI has now permitted banks to deal in offshore NDF INR market with effect from Jun 1, 2020.

 

Fiscal Policy Response

The government during this week has come up with two sets of measures: 1) Regulatory and compliance related changes and 2) Welfare measures targeting food, income disbursal and financial security for the financially weaker sections of the society. This section which comprises of the informal sector of the society is likely to be hit the most during the 21-day lockdown in India which started on Mar 24, 2020.

Within the ambit of regulatory and compliance measures, the government pushed the deadline to file IT returns and GST returns by 3-months to Jun 30, 2020, 10% additional charge will not be levied on delayed payments under ‘Vivaad se Vishwas’ scheme until 30 June, payment date under ‘Sabka Vishwas’ scheme for settlement of disputes under indirect tax payments has also been extended to 30 June, the threshold for default under IBC has been raised to INR 1 crore from INR 1 lakh. While these measures will provide smooth transitioning of businesses and corporates on resumption of work presumably after Apr 14, 2020, raising the threshold under IBC to INR 1 crore is a welcome step for the vulnerable MSME sector. Most importantly, for the common man the government has maintained that no charges will be levied on ATM withdrawals from other banks and has done away with minimum bank balance maintenance until 30 June.

The announced emergency measures encompass social security schemes which are already in existence whether it is ‘Ujwalla’ scheme for transitioning to the use of cooking gas, the employment generation scheme MGNREGA or cash transfer scheme PM KISAN. The government has increased cash handouts under MGNREGA, front loaded payments under PM KISAN, and has provided for free LPG cylinders for next three months under Ujjawala. The measures also include provision of free food to nearly 2/3rd of the population for the next three months. Though this is a welcome move however the transfer of the benefit to the end user is questionable when the distribution centers stand closed. The cash handouts on per month basis are also meagre to protect the targeted section from the economic hardships faced during the lockdown period. We believe certain state specific schemes like those introduced by UP, Punjab, Haryana, Delhi and Kerala (for details, see Table 2) should complement the schemes introduced by the central government to minimize the food and economic security concerns faced by the BPL and low income groups.

 

Our take

This is the first time in the history of MPC that the RBI refrained from providing forecasts for GDP growth and CPI inflation. While the central bank has emphatically underscored downside risks to growth and inflation, we can empathize with the lack of explicit forecasts as the impact of COVID-19 in case of India is still unfolding and various mitigating steps in the form of social distancing (like the recent nationwide lockdown) and potential up-scaling of testing/quarantine infrastructure could alter the shape of the COVID-19 curve. Amidst significant uncertainty in the reaction function of economic agents in an environment (touching upon medical, social, and economic aspects in one go) like this, it is prudent to lean on the side of policy accommodation and maximize stimulus/buffer measures to mitigate the confluence of unknown risks.

The fiscal, monetary, and regulatory policies have come together and provided a comprehensive policy response to minimize the collateral damage from the spread of COVID-19 pandemic in India. However, we believe the policymakers would continue to remain nimble footed as further interventions might be required to contain the adverse spillovers on domestic economy and financial markets. With more sector specific fiscal measures expected from the government, the central bank could consider coming up with OMO purchase of g-secs in a regular manner so as to offset the impact of global risk aversion and domestic fiscal slippage in the current backdrop.

Chart 1: Credit conditions have tightened significantly

 

Chart 2: Trajectory of COVID-19 curve in India

 

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