7thBi-Monthly Monetary

Policy Review 2019-20

27th March 2020 1

Extraordinary Times Require Extraordinary Measures –
Asymmetrical Rate Cut – Incentive For Banks To Lend

Key Rates Measures

CRR Reduced by 100 bps to 3%

Reverse Repo rate Reduced by 90 basis points to 4.0 per cent
Repo Rate Reduced by 75 bps to 4.40%

MSF Rate Reduced to 4.65% (limit increased from 2% to 3% of NDTL)

Bank Rate Reduced to 4.65%

SLR 18.25%

The RBI MPC refrained from providing any estimates on GDP growth and inflation given the uncertain economic
outlook but acknowledged that the FY2020 GDP growth estimate of 5% is at risk

“…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” – RBI Governor
2
Source: RBI
 Special Liquidity Measures

RBI Measures Liquidity Infusion Implication of these measures

Targeted long-term repo operations for government securities up to 1 Lakh Crore This could help in offsetting in part the adverse impact of the
three years for a total amount of Rs 1 lakh crore. These will be issued fiscal slippage in the offing
at a floating rate linked to the benchmark repo rate.

100 bps CRR cut to 3% for 1 year. 1.37 Lakh Crore Immediate infusion of liquidity into the banking system to help in
Also, a 1- time dispensation - reduced the requirement of minimum rate transmission
daily CRR balance maintenance from 90% to 80%
Accommodation of Marginal Standing Facility to be increased from 1.37 Lakh Crore The ability of banks to obtain funds from RBI on MSF rate
2% SLR to 3%. Banks can dip into their mandated pool of government increases by as much. This will provide additional liquidity
securities or the ‘statutory liquidity ratio’ to borrow from the RBI’s potential to the debt market.
marginal standing facility.

TOTA LIQUIDITY INFUSION IN THE SYSTEM 3.74 Lakh Crore Total liquidity potential in the market to increase to Rs 6 lakh cr .
This will improve in rate transmission. It will in turn lead to
compression in yields.

Since the last MPC meeting of February 2020, RBI has injected liquidity of Rs. 2.8 lakh crore through various instruments, equivalent to
1.4 %of our GDP. Together with the measures announced today, RBI’s liquidity injection works out to about 3.2% of GDP.
3
Source: RBI Documents & Internal Analysis
 RBI’s Relief To Borrowers

 RBI Measures Implication

 A moratorium on loan repayments for three months on all term loans and working capital • This will lead to easing of debt
loans has been announced. This will apply to all banks, non-bank lenders, microfinance servicing pressure on the
companies. borrowers.
• Will reduce the impact of
 Allow a deferment of three months on payment of interest on working capital facilities financial stress to the real
economy
• At the same time, banks too
 Deferment of Implementation of Net Stable Funding Ratio (NSFR) from April 1 2020 to Oct 1 would not see their asset
2020 quality get stressed due to
deferment of loan/interest.
 The Net Stable Funding Ratio (NSFR), which reduces funding risk by requiring banks to fund • Resultantly, the supply
their activities with sufficiently stable sources of funding over a time horizon of a year in pressure from corporate CPs
order to mitigate the risk of future funding stress. may come down.
 The implementation of the last tranche of 0.625% of the Capital Conservation Buffer has been • The yields in the money market
delayed from March 31, 2020 to September 30, 2020. may thus find sharper
compression.
 The capital conservation buffer (CCB) is designed to ensure that banks build up capital
buffers during normal times (i.e., outside periods of stress) which can be drawn down as
losses are incurred during a stressed period.

4
Source: RBI Documents
Monetary Policy Committee Keeps Rates Unchanged

Name MPC Stance

Governor Dr Shaktikanta Das RBI Voted in favor of 75 bps cut

Deputy Governor Dr. Michael D Patra RBI Voted in favor of 75 bps cut

Dr. Janak Raj RBI Voted in favor of 75 bps cut

Government
Dr Chetan Ghate Voted in favor of 50 bps cut
nominated
Government
Dr Pami Dua Voted in favor of 50 bps cut
nominated
Government
Dr Ravindra H Dholakia Voted in favor of 75 bps cut
nominated
5
Source: RBI
 RBI Move Seeks To Ease The Corporate Bond Spread Compression In
The Near-Term
Spread Between 5-year Rated Corporate Bonds And 5 Year Gilt

BBB

AA

AAA

Source: Bloomberg, Kotak Institutional Equities

Debt Outlook

 The large liquidity infusion and rate cut may lower rates. This may ease liquidity issues for banks which
would be passed on
 The pace of loan growth for the system may sharply fall in the near term
 However, lower yields may make it relatively unattractive for banks to park money in Reverse Repo. This
may kick start the lending to productive sectors
 Banks overall will benefit with the cut in CRR and the lowering of requirement for maintaining CRR
balances
 Loan moratorium should also help offset near-term challenges to asset quality. The RBI policy has
provided adequate liquidity to the system
 The policy focuses on dis-incentivizing banks to park surplus money with RBI and lend to corporate bond
market. Thus , the better rated/ run NBFCs will get cheaper funds. However the lower rated NBFCs may
need additional steps to redress their liquidity needs
 We expect banks to lower deposit rates in weeks ahead
7
Debt Outlook

 The 3 month interest payment deferment is the need of the hour for borrowers and will ease pressure on
corporate. As a fallout, some of the currently healthy and solvent borrowers may likely avail the
moratorium and defer loan payments
 Expect corporate bonds to now outperform government bonds as the spreads may ease in weeks ahead
 We prefer low to mid duration strategies on risk adjusted basis.
 SDL spreads have widened significantly ~130-160bps on a 10 year curve. We may see a good compression
in these spreads. Therefore investors who have appetite for volatility and who are looking for duration
gains, can look to invest in the Gilt and Bond Funds space.
 We believe that opportunities in the 1-3yr yield curve space are a potent option for investors. For this
reason, investors with 6 month plus investment horizon may consider investing in corporate bond
space.
 In the same vein, the investment opportunity in short duration bond funds, banking and PSU funds,
credit funds and dynamically managed duration funds is still present and becoming more attractive.
Investors may look to invest in the funds depending on the scale of risk appetite and the investment
horizon. 8
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