The Reserve Bank of India fired Bazooka 2.0 in response to COVID-19 Pandemic. RBI seems appropriately placed in a 'whatever it takes'
mode to assist financial markets to navigate these unprecedented times.
India is among a handful of countries of G20 group that is projecting positive growth, said the RBI Governor in his speech on April 17.
In a host of measures, RBI started with a 25 basis points cut in reverse repo rate bringing it down to 3.75 percent. Reverse repo is the interest rate which banks receive for parking funds with RBI. This lowering gives banks higher incentive to lend to businesses instead of parking with RBI.
RBI measures that will benefit debt mutual funds --
RBI's measure of additional capital infusion of total Rs 50,000 crore to NABARD, SIDBI and NHB will improve the credit rating of these institutions.
It is expected that better rated credit papers of NABARD and SIDBI will be available for subscription to mutual funds, especially gilt funds, which invest mostly in government securities.
MF investment pool of securities is also expected to benefit from RBI mandate that banks must use 50 percent funds under TLTRO 2.0 for small and mid-size NBFCs.
The targeted long-term repo operations (TLTROs) are a category of funds in Indian banking system to finance NBFCs and Micro Finance Institutions through banks.
With greater capital infusion to NBFCs and MFIs, their credit rating will revive. Higher-rated NBFC and MFI papers will be available for MFs to invest in 2020.
Debt markets reacted positively on April 17 after RBI announcements. "Market reacted positively to RBI announcements with 10Y yield dropping 7-10bps. Shorter term yields dropped more as reverse repo rate was reduced. Corporate bonds yields also fell, especially NBFC and HFCs on TLTRO and special refinance scheme. Markets are still awaiting government stimulus plans and impact on fiscal deficit and gross borrowings,” said Avinash Jain, Head Fixed Income, Canara Robeco MF.
Mutual Funds are largest domestic investors in NBFCs debt papers.
The sequence of defaults by NBFCs since IL&FS, ADAG group, Essel Group had led to MFs side pocketing the default portion in debt schemes that hit NAVs of debt schemes upto 25 percent during 2019.
With RBIs help, NBFCs have now scope to improve their credit ratings.
Another important RBI measure gives both lending entities - the NBFCs and the banks - to avoid bad asset demarcation in their balance sheet for a certain period.
NBFCs are allowed to relax NPA classification for borrowers under moratorium.
Non-banking finance companies can also avail relaxed non-performing assets (NPA) classification to their borrowers, said RBI Governor Shaktikanta Das.
NPA classification for banks will exclude the three-month moratorium period.
Due to ongoing national lockdown since March 25, 2020 till May 3, 2020 the entire month of April has shut down of production, manufacturing, exports and transport except essentials like grocery and medical products.
Industry would have had problems in returning their working capital loans to NBFCs and banks and servicing interest on debts papers owned by mutual funds.
"RBI has reiterated that it stands ready to act with its entire toolkit at an appropriate time to ensure that financial stability is not impaired at any cost,” said Kumar Ramakrishnan, CIO, PGIM Mutual fund.
“We maintain our stance that RBI could cut rates by upto another 50 bps in the next 2-4 months to further stimulate credit growth and ease debt costs for borrowers. Further, additional refinancing facilities aggregating Rs 500 bn to SIDBI, NABARD and NHB should also partly help MFIs as they enjoy credit lines with these lenders,” he added.
“To sum up, the actions of the RBI can be broadly be termed as action points to a) plug the loop-holes observed with the first round of ‘bazooka’ policy actions on March 27th (TLTRO-2 with additional covenants), b) address the sectors/entities/issues which are under immediate stress at the moment (NBFCs, commercial real-estate, even states) and, c) incentivize the banks to lend by deferring their statutory obligations, aiding liquidity and reducing rates,” said Navneet Munot CIO, SBI Mutual Fund.