Published on 30/03/2020 7:05:15 PM | Source: iFAST Financial India Research Desk

RBI`s March 2020 Monetary Policy: A Much Needed Boost inTimesof Financial Carnage - iFAST Financial

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Liquidity Improvement

Targeted Long-Term Repo Operations (LTRO)

* RBI will conduct auctions of targeted long-term repos (in tranches) of up to a 3-year tenor for a total amount of up to Rs 1,00,000 crore, at a floating rate linked to the repo.

* These funds will then be made available to the banks by the RBI, and will have to be invested by the banks within 15 days in investment grade corporate bonds, commercial paper and non-convertible debentures. This will be in addition to their outstanding investments in these instruments.

* 50% of such investments will have to be acquired by banks from primary market issuances, and the balance 50% can be bought from the secondary market (such as mutual funds and non-banking financial companies). These acquisitions shall classify as held-to-maturity investments and not marked-to-market, thereby reducing volatility in their financials.


Cash reserve ratio (CRR)

The RBI reduced the CRR, which represents the ratio of net demand and time liabilities that banks are required to deposit with the RBI, by a 100 bps. Reduction will release Rs 1.37 lakh crore into the system, and hopefully address the asymmetrical distribution of liquidity vis-a-vis requirements.


Statutory Liquidity Ratio (SLR)

SLR represents the extent of net demand and time liabilities that banks have to invest in liquid instruments specified by the RBI. The reduction of this rate by 25 bps will ensure that banks have more capital to lend to the economy


Marginal Standing Facility Rate (MSFR)

MSFR is the rate of interest at which scheduled banks borrow overnight from the RBI (against government securities) to meet cash shortages or liquidity-related challenges. In times like these, higher volatility in the markets and an economic downturn results in a liquidity crunch. To tackle this, the RBI has permitted banks to tap into their SLR reserves. MSFR, as a percentage of SLR, has been increased from 2% to 3%. This reduces the need for banks to borrow overnight funds from the RBI. However, even after doing this, if banks need to borrow additional overnight funds from the RBI, they can do so at a reduced rate of 4.65%, as against the earlier rate of 5.4%. This lower rate of interest can then be passed on to the borrowers. By way of these norms, nearly Rs 1.37 lakh crore of liquidity will be infused into the system.


Loan Relief

The RBI has allowed banks and non banking financial companies (NBFCs) to offer a moratorium on various credit products. However, no asset classification downgrade (i.e., accounting for non-performing assets) will have to be done by banks and NBFCs, thereby reducing their provisioning and keeping their capital base intact. The moratorium will also not affect the credit history of the borrowers.


Retail Term Loans

* All banks and non-banking financial companies are permitted (not mandated) to allow a 3-month moratorium on payment of instalments of all retail term loans outstanding (principal as well as interest) as on March 1, 2020.

* The due dates of equated monthly instalments (EMIs) will stand deferred to June 2020, consequently causing the repayment schedule, subsequent payment dates and tenor to shift by 3 months.

* Credit card dues, despite being a revolving credit facility, can also be deferred in the same fashion as term loans.


Working Capital

* Banks and NBFCs are allowed (not mandated) to allow deferment of interest payments by 3 months in respect of cash credit and overdraft facilities outstanding as on March 1, 2020. Accumulated interest of these 3 months (March-May 2020) will be payable at the end of the period.

* Drawing limits of borrowers can be recalculated through reduction of margins and/or reassessment of the duration.


Macroeconomic Outlook Offered


* The global outlook appears gloomy as pain points are seen everywhere.

* Expectations of a shallow recovery in 2020 vis-a-vis 2019 have been dashed.

* Signs of recession are visible, and intensity, duration and spread of Covid19 will determine what lies ahead.

* Central banks and governments working towards financial stability and demand push.



* Covid19 updates are being monitored closely.

* Outlook for agriculture and allied activities is positive, with foodgrains output, at 292 million tonnes, coming in higher by 2.4 percent year-on-year.

* Service indicators look weak, and several sectors are hit because of the pandemic.

* GDP targets (4% in Q4 FY20, 5% for FY20) are at risk.



* CPI in February 2020 was 6.6%, versus 7.6% in January.

* May stay benign in the coming months due to depressed demand, sufficient food grain and horticulture production.

* The MPC targets to keep it in the range of 4% (+/- 2%) in the medium term.

* Low crude prices should act in India’s favour.



* The agrarian sector should do well since the government hasn’t imposed any restrictions on essential goods and services.

* Industrial and service sectors will succumb to the ongoing pandemic and bear the brunt of weaknesses in supply chains.


Financial Markets

* Steps will be taken to improve depth and price discovery in foreign exchange dealings by reducing arbitrage between onshore and offshore markets.

* This assumes importance on account of increased volatility in the USD-INR rate in recent weeks.


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