RBI Governor Shaktikanta Das May 22 addressed the media for the third time in three months to announce Coronavirus-related relief measures.
Here are the key highlights:
--Repo rate cut by 40 bps to 4 percent, Reverse Repo gets adjusted to 3.35 percent.
--GDP growth outlook for FY21 seen in negative territory, some pick up seen in H2 of FY21.
--Term loan moratorium extension for another three months till August 31
--Accumulated interest for moratorium period can be converted into a term loan. It does not have to be repaid immediately after moratorium ends
--Group exposure limit for lenders increased to 30 percent from 25 percent
> April 17
- Inflation could decline further and settle below 4 percent by H2FY21
- Inflation to fall below 4 percent target by Q3, Q4
> March 27
- Implied GDP growth of 4.4 percent in H2 is now at risk
- Projection of growth and inflation to be heavily contingent on spread of pandemic
H
Among the different sectors, the RBI announcements today are expected to benefit the real estate sector the most. This includes both the 40 basis points repo rate cut as well as the three-month term loan moratorium extension. These measures will infuse liquidity in real estate sector.
MihirVora, Director & Chief Investment Officer, Max Life Insurance said thatthe credit risk-aversion in the financial markets are likely to continue.
"The high-rated borrowers will continue to get easy funding, and the lower-rated borrowers will continue to struggle to raise funds.More direct fiscal support to businesses, workers and stressed segments will be needed to contain job losses,stimulate the demand-side of the economy andencourage private sector investments to counter the demand shock due to the domestic lockdown and fall in exports," said Vora.
RBI governor Shaktikanta Das also said in his speech that central banks are typically seen as conservative institutions. Yet when the tides turn and all the chips are down, Das said that it is to them that the world turns for support.
As the nation prepares for this future, RBI governor Shaktikanta Das said thatthe words of Mahatma Gandhi should inspire us to fight on, "We may stumble and fall, but shall rise again..."
As far as transmission is concerned, RBI governor Shaktikanta Das said that the one-year median marginal cost of funds-based lending rate (MCLR) declined by 90 bps (February 2019-May 15, 2020). The weighted average lending rate (WALR) on fresh rupee loans has cumulatively declined by 114 bps since February 2019, of which 43 bps decline occurred in March 2020 alone.
Experts said that the six-month moratorium may hurt banks further.Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co. said that while Borrowers heave a sigh of relief, banks and financial institutions will continue to worry.
"Their access to committed cash flow continues to remain in suspension and in the already stretched system, banks will find it a challenge to meet the growing needs of financing, the demand for which will continue to be on an increase.With IBC suspension being on the anvil, while provisioning and asset classification benefits will extend, banks in India will continue to face a challenge with their assets, especially with the moratorium being further extended," she added.
R KGurumurthy, Head-Treasury, LakshmiVilasBank said, "Bonds have rallied in response to this unexpected announcement.Some profit taking and the overbearing caution that RBI continues to be vigilant and battle ready, would induce an element of volatility in prices. Given the uncertainties ahead on both growth and need for further monetary and fiscal support, markets may start expecting some special dispensation on HTM holdings of government securities."
