Sunday, 24 May 2020

RBI – Tenacious In Its Defense of

RBI – Tenacious In Its Defense of The Indian Economy

In yet another unscheduled session by the MPC, the committee took several decisions to support the health of the domestic economy. The RBI also confirmed fears that India’s GDP is likely to contract for the first time in over 2 decades. The latest round of announcements can be seen as an attempt to ensure that companies and the economy at large survive the crises.

Key Announcements

·         Policy Repo & Reverse Repo rates reduced by 40bps. Reverse Repo at 3.35% is lowest since 2009
·         Accrued interest on Working Capital loans in the moratorium period of 6 months to be converted into funded loans repayable within the current fiscal of 2021.
·         Additional measures in four areas (Refer Annexure for details)
o    To improve functioning of markets
o    To support export & imports
o    To ease financial stress 
o    To ease financial constraints faced by state governments

Our View

The RBI has taken several measures over the last three months, many of them unprecedented to support the Indian financial system and the domestic economy against external shocks. The latest set of announcements is aimed at supporting companies by drawing out debt tenures over extended periods of times with the endeavor of mitigating default risks as the moratorium period for these companies comes to a close. The framework in our view, is a balancing act between the bankers and the end borrowers and is a healthy approach given the dire situation many of these companies are in.
The RBI also cut rates to decadal lows. The last time we saw the repo rates at 3.25% was during the height of the Global Financial Crises in 2009. 

The emphasis of the governor’s speech clearly emphasized on transmission of rates. So we do expect borrowing and deposit rates to adjust fairly quickly. On an optimistic note however, the RBI governor has also stated the RBI will use its entire arsenal of tools and fashion new ones as needed to protect the financial system.
From an investment standpoint short bonds are likely to see opportunities across the short bonds space as the rate cut is likely to reflect in a lower YTMs across the curve. We continue to retain our positioning across all debt products and continue to favor high quality short term strategies at this juncture.


(A)    Measures to Improve the Functioning of Markets
a.       Extension of special repo to SIDBI by an additional 90 days
b.       Extension of the Voluntary Retention Route (VRR) for FPIs
(B)    Measures to Support Exports and Imports
a.       Export Credit - increase the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to 15 months, for disbursements made up to July 31, 2020.

b.       Liquidity Facility for Exim Bank of India - Extend a line of credit of ₹15,000 crore to the EXIM Bank for a period of 90 days (with rollover up to one year) so as to enable it to avail a US dollar swap facility.

c.       Extension of Time for Payment for Imports – Extension of time period for completion of outward remittances against normal imports (i.e. excluding import of gold/diamonds and precious stones/jewellery) into India from six months to twelve months from the date of shipment for such imports made on or before July 31, 2020.

(C)    Measures to Ease Financial Stress
a.       Extension of moratoriums by additional 3 months from June 1, 2020 till August 31, 2020 taking the total period of applicability of the measures to six months (i.e. from March 1, 2020 to August 31, 2020).

b.       Permit lending institutions to convert the accumulated interest on working capital facilities over the total deferment period of 6 months (i.e. March 1, 2020 up to August 31, 2020) into a funded interest term loan which shall be fully repaid during the course of the current financial year, ending March 31, 2021.

c.       Group exposure limit of banks is being increased from 25 per cent to 30 per cent of eligible capital base, for enabling corporates to meet their funding requirements from banks. The increased limit will be applicable up to June 30, 2021.

(D)    Measures to ease financial constraints faced by State Governments

a.       Special withdrawal norms from the Consolidated State Fund within limits to meet about 45 per cent of the redemptions of their market borrowings, due in 2020-21.

Detailed guidelines for all the above announcements will be issued separately.


Source of Data: RBI Governor Press Conference briefing & RBI Monetary Policy Statement dated 22nd May 2020, Axis MF Research

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