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 has decided to use a novel way to influence interest rates. The repo rate has come down to 4.4 per cent, while the reverse repo rate is now 4 per cent with a difference of 40 bps. The idea is to ensure that banks do not deposit surpluses in the reverse repo auctions, which is averaging Rs 3 trillion on a daily basis. Now, they will be forced to invest their surpluses in credit rather than giving it to the RBI. This is probably the first time that the central bank has changed this corridor size to 65 bps from 40 bps. It will be interesting to see how banks respond, as they would need to be more responsive to the need of the hour and change their mindset to ensure they lend more to companies.
The move to expand liquidity in the system is again very noteworthy. The twist this time is that the long-term refinance option (LTRO) of Rs 1-trillion will have to be invested in corporate bonds, commercial papers (CPs) or debentures, which in a way will be beneficial for the markets and is, hence, novel. While the LTRO was so far targeted at providing funds for direct lending, this time it is more for direct subscription of paper, which also means it cannot be hoarded or invested in government paper. Second, the cash reserve ratio (CRR) cut provides another 1 per cent of NDTL to banks for lending purposes with a lower minimum daily balance to be maintained.
The MSF increase of 1 per cent, along with the above two measures, would infuse another Rs 3.74 trillion into the system – that is a big jump in liquidity. Combine this with the open-market operations (OMO) and LTRO of the past, and the monetary stimulus provided is 3.2 per cent of GDP, which is quite substantial from the point of view of the RBI, which has supplemented the efforts of the government in alleviating the pain caused by Covid-19.
The regulatory measures are also important because this is something that the market players were looking forward to. The three-month moratorium on all term loans is quite the need of the hour, which will make it easier for companies as the cut in supply chains and the lockdown have meant a severe blow to most companies in terms of their ability to service debt. For banks, a deferment of maintenance of the last tranche of the capital conservation buffer would provide relief as they also readjust their balance sheets to meet regulatory compliances.
On the whole, the announcements are very good and the RBI has done this well in time so that from the monetary end all impediments are addressed to a large extent. The assurance that Indian banks are very safe is timely, as there had been some scepticism building up early this month.
The author is chief economist at CARE Ratings.