All eyes were on the Reserve Bank of India (RBI), with expectations that the central bank would shore up the fortunes of the broken debt markets. There were debates as to whether the RBI will wait for the Monetary Policy Committee meeting that was scheduled for April 3 or would it go for the jugular earlier.
The governor beamed on television this morning. Even before presenting all the other measures per se, the first announcement was that the Monetary Policy Committee meeting has already taken place, and that the announcements are happening now!
Sharp rate cuts
The first shot: a repo rate reduction of 75 basis points, from 5.15 per cent to 4.4 per cent. That was like a “sixer.” Even though market participants were calling for large rate cuts, at least as a morale booster, it is a different game on the other side of the table.
The second “boundary,” was the reduction in the reverse repo rate by 90 basis points, from 4.9 per cent to 4 per cent. Liquidity per se was not the issue; trading channels became dysfunctional in spite of surplus liquidity. Banks were parking the hordes of cash with the RBI under the liquidity adjustment facility (LAF). The more-than-proportionate reduction in reverse repo rate is to discourage banks from parking the surplus money with the RBI, and to make them to lend.
Then came a strike that showed that the RBI was playing solidly on the front foot: Targeted Long Term Repos Operations (TLTROs). The Reserve Bank will conduct auctions of targeted term repos of up to three years’ tenor, of appropriate sizes, for a total amount of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate. Liquidity availed under the scheme by banks has to be 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 shall be required to acquire up to fifty per cent of their incremental holdings of eligible instruments from primary market issuances and the remaining fifty per cent from the secondary market, including from mutual funds and non-banking finance companies. Investments made by banks using this facility will be classified as held-to-maturity (HTM), even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio.
Reviving sulking debt markets
Why is the move a massive sixer? Government Securities were witnessing some transactions in the secondary market. But the market for corporate bonds and commercial papers had dried up. There were expectations in the market, that either the RBI allow repo in corporate bonds over and above G-Secs or it promote an SPV with capital from the government / RBI. That is, generate liquidity in some form, in the dysfunctional corporate bond market, which was not “working from home.” What has been done will have a similar effect; banks will borrow money from the RBI at around 4.4 per cent and deploy in good quality bonds where the yield levels are much elevated nowadays. It is free from mark-to-market volatility as it will be part of the HTM portfolio. Simply put, banks have been thrown open the door to borrow at around 4.4 per cent and deploy the funds at almost double the yield. RBI says investment grade, but banks can stick to AAA or A1+ rated papers from a risk management point of view.
The big “Sixers” weren’t over. CRR is reduced by 1 per cent point, from 4 per cent to 3 per cent. This would release approximately Rs 1.37 lakh crore (Rs 1.37 trillion) to banks for lending purposes. This is not earning anything for them currently, but will now become productive.
Something for everyone
Want some more? Measures were to come not just for the “market” or “big boys”, but for everybody. All commercial banks, co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months. That is, people facing hardship in the current situation may be granted a holiday of three months. This will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade.
Moreover, regarding working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020.
The Capital conservation buffer (CCB), which is part of the capital of banks as per Basel III norms, which was to be implemented by March 31, has been deferred to September 30, 2020. Some breathing space. Non-Deliverable Forward (NDF) market that works offshore on INR (Indian rupee) derivatives, were out of bounds for banks in India. Banks will now be allowed to participate from June.
Usually, after a RBI policy review, the discussion is about the measures and the impact on the market and economy. While this is always true, we are going through challenging times and the desperate measure will bring succour to stakeholders: people who have taken retail loans, corporates who have taken big ticket debt, MSMEs, mutual fund investors (banks can use TLTRO money to buy bonds from MFs) and the bond market generally, which is the yardstick for pricing of credit in the entire economy. All global central banks are saying “whatever it takes.” The RBI also has walked the talk.(The writer is founder, wiseinvestor.in)