RBI Comes Out Guns Blazing; Pulls Out All The Stops
The RBI came out all guns blazing once again on Friday morning, pulling out all the stops to counter the potentially devastating economic effects of the COVID-19 pandemic, in the face of which the possibility of an extended global recession becomes more real with every passing day of lockdown.
The most prominent announcement was the Targeted Long-Term Repo Operation (dubbed TLTRO 2.0), under which liquidity amounting to Rs. 50,000 Crore would be made available to mid and small-sized NBFC’s. This will help significantly ease the pressure that the sector is due to face, given the 3-month moratorium that they are mandated to offer their borrowers. Additionally, the 25-bps reduction in reverse repo would help bring down the short-term rates by 25-50 bps.
The relaxation of NPS classification norms and the one-year extension for real estate project commencement by NBFCs will help reduce stress within the Real Estate sector; which has already been reeling under the pressure of swathes of unsold inventory, coupled with muted demand for the better part of the last decade.
Additionally, the three-month extension window for NPA reckoning for stressed assets essentially postpones NPA classification for accounts that were slipping towards defaults between March and May, giving many beleaguered companies some much-needed breathing space to get their houses in order.
The reverse repo was slashed further from 4.0% to 3.75%, in a bid to disincentivize banks from parking their surplus funds with the RBI, and to go out and lend instead. This should definitely help in increasing credit flow to the economy over the coming months and quarters.
Early, it had been widely anticipated that the RBI would announce some direct measures to help debt mutual funds keep their heads above water. Many short-term debt funds are reeling from the lethal combination of increased redemption pressure and bond market illiquidity, which has forced them to go out and stretch their 20% borrowing limit. According to sources, SEBI – the regulator and AMFI – the apex body, are discussing the matter today.
RBI’s “do what it takes” tonality was cheered by the capital market, with major indices trading between 1.5% and 2% above their previous close with two hours still remaining to the closing bell.
