RBI Fires its Second Salvo…

The RBI released a statement today wherein it provided its assessment of the current state of the economy and some additional measures to tide over the current situation. The announcements made today are part of the Governor’s statement and not an outcome of MPC meet.

Assessment of the Economy:

As per the RBI’s assessment, in conjunction with the IMF projections, states that macroeconomic financial landscape has worsened over the course of the lockdown scenario prevalent globally. The loss to the global GDP has been estimated at US$ 9 trillion. The emerging market economies are particularly hard hit, as they grapple with capital outflows and volatile exchange rates.

On the domestic front, the recently announced macroeconomic data like the IIP do not fully reflect the true picture as it covers partially the pre-lockdown period. The other indicators such as electricity generation, auto sales & production and PMI numbers provide a more realistic picture of the current state of the economy. The external sector reflected the global trade sentiment; the exports contracted by 34.6% in Mar’20 and imports contracted by 28.7% over the same period.

All is not gloom and doom though, for both global as well as domestic economy. As per the IMF projections, the global economy may witness a V-shaped recovery of close to 9% in 2021. The domestic economy too is expected to post a sharp recovery and grow at the rate of 7.4% in FY22. The agriculture and allied activities have shown resilience on the back of all-time high levels of production. The pre-monsoon kharif sowing too has begun strongly. The IMD in its latest forecast has indicated a normal monsoon season, with rainfall expected to be 100% of the long-term average. The level of foreign exchange reserves continues to be robust at US $ 476.5 billion on April 10, 2020 equivalent to 11.8 months of imports.

Additional Measures:

Given the reading of the RBI of the current situation, it decided to implement some further measures to support the broader economy in general and the financial system (through some targeted measures) in particular. The four key factors that have been considered to propose these measures are, (i) maintain adequate liquidity in the system and its constituents in the face of COVID-19 related dislocations; (ii) facilitate and incentivise bank credit flows; (iii) ease financial stress; and (iv) enable the normal functioning of markets. The key measures announced are as follows:

  • Targeted Long-Term Operations (TLTRO) 2.0 – TLTRO 2.0 for an aggregate amount of Rs.50,000 crore, in tranches of appropriate sizes. The earmarked amount is specifically targeted towards NBFCs. The NBFCs have to be of investment grade and 50% of the amount availed should be provided to mid and small size NBFCs.
  • All India financial institutions (AIFIs) such as the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) shall receive refinance facilities to the tune of Rs. 50,000 crores cumulatively.
  • The reverse repo rate reduced by 25bps from 4% to 3.75%. All the other rates such as, repo rate, MSF rate and bank rate remain unchanged.
  • The ways and means advances (WMA) limit of states hiked from 30% to 60%, to enable states to plan their market borrowing programmes better.

Our View:

The RBI stands firmly behind its commitment of “whatever it takes” and has clearly indicated that these would not be the last ones and it may announce fresh measures as well as extension of the current ones, depending on the developing scenario of the economic impact of the ongoing pandemic. The measures to an extent would also be dependent on the fiscal response.

The current set of measures largely address the liquidity concerns of the intermediaries, to ease the financial concerns and enable normal functioning. While the measures address the three major factors that form the basis of the announcements, there has been little by way of enabling credit flows. The cut in reverse repo rate may not lead to credit channels being opened by banks, especially given the height of risk averseness prevalent at the current juncture. The measures announced today are more pertaining to maintaining the health of financial intermediaries, to ensure that flow of capital resumes in a smooth manner once the lockdown ends and the market participants strive to get back to normalcy. The RBI may have to come up with some fresh measures, specifically targeting transmission and indicating its preparedness to support any fiscal constraints.

From an investment perspective, we continue to prefer short to mid segment of the yield curve. The risk of fiscal slippages is very real and the extent of it is yet unknown. The liquidity enabling and market supporting measures are expected to be beneficial for the corporate segment. The TLTRO 2.0 is specifically targeted towards NBFCs and given the duration of this operation it may be supportive of alleviating the stress in the corporate segment at the shorter end of the curve.


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