RBI Policy: Unprecedented Times, Unprecedented Measures

The RBI had been cognizant of the economic conditions and cut policy rates during the course of 2019, but it maintained a slow and steady approach. Over the last few months, the RBI’s headroom for direct support to growth was restricted owing to spike in inflation numbers, resulting in the central bank focusing rather on efficient transmission. The wildfire like spread of the corona virus pandemic and its far-reaching economic impact across the globe has bought growth to a virtual standstill. Not only the economic growth has been impacted but also the capital markets have been hit by unprecedented volatility, in the wake of flight to safety in favour of US$.

The RBI announced several measures to slay the demon of the pandemic led economic growth concerns and reaffirmed its resolve to incessantly pursue policies and actions that are accommodative. The RBI announcement is inclusive of all the possible actions from a monetary policy perspective, like the rate action to bring down policy rates directly, liquidity action to support effective transmission of lower rates  to ultimate users of credit, and a number of regulatory and developmental measures. The key measures announced by the central bank in its preponed Seventh Bi-monthly Monetary Policy Statement, are as follows:

Rate Action:

    • The policy repo rate reduced by 75bps to 4.40% from 5.15%.

In view of the persistent excess liquidity, the policy rate corridor widened from 50bps to 65bps. The reverse repo rate under the liquidity adjustment facility (LAF) would be 40 bps lower than the policy repo rate, while the MSF rate continues to 25bps above the policy rate. The reverse repo and MSF rate stand revised to 4% and 4.65% respectively

Liquidity Action:

    • Targeted LTRO for a total amount of Rs. 1 Lakh Crs. of upto 3 years, which will have to deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020. Banks will be required to acquire 50% of the amount from secondary market.
    • CRR reduced by 100bps to 3%. Furthermore, daily CRR balance maintenance reduced from 90% to 80%.
    • MSF borrowing limit increased from 2% to 3%.

Developmental Action:

    • Banks permitted to allow moratorium of three months on payment of instalments of all term loans.
    • Banks permitted to allow a deferment of three months on payment of interest on working capital facilities.
    • Banks permitted to participate in the non-deliverable forward (NDF) market with effect from June 1, 2020.


The RBI states, “the macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic. Central banks across the world have responded with monetary and regulatory measures – both conventional and unconventional. Governments across the world have unleashed massive fiscal measures, including targeted health services support, to protect economic activity from the impact of the virus. The Government of India has yesterday announced several measures. The MPC further noted that the Reserve Bank has taken several measures to inject substantial liquidity in the system. Nonetheless, the priority is to undertake strong and purposeful action in order to minimise the adverse macroeconomic impact of the pandemic.” The RBI particularly noted that the outlook on growth and inflation is highly uncertain.


The measures have addressed all the fundamental issues in a comprehensive manner using both conventional measures like cut in the repo rate to the tune of 75 bps and the CRR cut of 100 bps, and also substantial liquidity measures, apart from actions like access to domestic banks in offshore currency NDFs. The relief given on the repayments in term loans is indeed a very timely action and would serve to remove lot of stress which many borrowers may face in the coming days. This is a direct and targeted approach to the fluid situation in the face of an uncertain inflation and growth trajectory. This scaffolds the positive impact of the fiscal measures and strengthens our response to the adverse economic impact of the pandemic. The impact of the rate easing measures can only be gauged once the domestic as well as externa economies come out of lockdown. At the current juncture the growth variables are solely dependent on how quickly a cure for COVID-19 is found and the world is able to control the pandemic. In view of the highly uncertain situation, the RBI has refrained from giving any projected numbers for inflation and growth. These measures would definitely help in keeping the pastures green, till the time things return to normalcy.

The liquidity inducing measures would be supportive of the debt markets. In the wake of sharp sell-off by FIIs and in some part by domestic institutions led to yields hardening across the curve over the last one month. The corporate bond curve was especially hard it as market liquidity dried-up. The expected revival of participation from banks and mutual funds also getting a line of liquidity, the situation may normalise, and the combined effect of rate cuts may lead to yields trading with an easing bias from here on.

From a portfolio perspective, the easing rates and the liquidity will help yields to move down to lower levels. These measures augur well for both the equity and debt segments of the market. More than anything else, this is likely to bring in greater stability in the markets. There may be further action from the government and the RBI if the situation warrants, that is if the conditions further deteriorate. But let us hope and pray that it may not be required. The investors would be advised to continue to maintain investments at the shorter to mid segment of the curve, as the corporate bond segment has witnessed a spike in yields and at the current juncture this segment provides a dual benefit of high accruals as well as high probability of mark-to-market gains; phenomenon witnessed in 2019 as well. The investors would be advised to refrain from taking positions at the longer end of the yield curve, as additional fiscal measures to support growth may lead to increased government borrowing. An enhanced government borrowing may keep the long-term rates sticky at elevated levels.

Leave a Reply