RBI’s Bazooka 2.0 to Beat COVID-19 Slowdown

RBI’s Bazooka 2.0 | RBI Press Conference Key Highlights (April 17, 2020)

Introduction

To beat COVID-19 slowdown, RBI’s Bazooka 2.0 is announced by RBI Governor, Mr. Shaktikanta Das with additional liquidity boosting measures to ease financial stress stemming from nationwide lockdown amid COVID-19 pandemic. Key highlights of today’s press conference held by RBI Governor are discussed in detail.

RBI’s Bazooka 2.0 to Beat COVID-19 Slowdown

• India has entered the second phase of nationwide lockdown to fight the COVID-19 pandemic.
• Reserve Bank of India Governor Shaktikanta Das on April 17 announced additional measures to address following :
  1. Improve liquidity in money market particularly for NBFCs
  2. Facilitate and incentivise Bank Credit Flows
  3. Ease  Financial Stress
  4. Enable normal functioning of markets
• This was the RBI’s second COVID-19 relief measures announcements in less than a month. In the previous address on March 27, RBI had announced a repo rate cut of 75 basis points and several other liquidity releasing measures to support the Indian financial system.

RBI’s Bazooka 2.0 – Liquidity Measures

1. Targeted Long-term Repo Operation (TLTRO) 2.0

• RBI is going to conduct Targeted LTRO 2.0 for an aggregate amount of Rs.50,000 Cr, to begin with, in tranches of appropriate sizes.
• The funds availed by banks under TLTRO 2.0 should be invested
  in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, MFIs etc.
• In this LTRO, at least 50% of the amount must go to the Mid and Small-sized Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs).
• As in the case of TLTRO auctions conducted hitherto, investments made by banks under this facility will be classified as held to maturity (HTM). Exposures under this facility will also not be reckoned under the large exposure framework.

2. Reverse Repo Rate cut by 25 bps to 3.75% from 4%

• A surplus liquidity has been rising in the banking system due to various liquidity enhancing measures by RBI.
• The amount absorbed by RBI under reverse repo operation was almost Rs.6.9 Lakh Cr (as on 15^th April, 2020). Whereas, Banks Credit Growth is at 6.1% in February 2020 (22-months lowest credit growth). As shown in below graph.
• Thus, in order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of economy, RBI cut reverse repo rate for the second time by 25 bps to 3.75% from 4%.

3. Special Refinancing Facility of Rs.50,000 Cr for NABARD, SIDBI, NHB

• AIFIs (All India Financial Institutions) like NABARD (National Bank of Agriculture & rural Development), SIDBI (Small Industries Development Bank of India), NHB (National Housing Bank) play a key role in meeting long-term funding requirements of India’s crucial sectors.
• These institutions meet credit needs of Agriculture and the Rural sector, Small industries, Housing Finance Companies, NBFCs and MFIs respectively.
• In view of the tightening of financial conditions in the wake of the COVID-19 pandemic, these institutions are facing difficulties in raising resources from the market.
• So, RBI has announced to provide special refinance facilities for a total amount of Rs.50,000 Cr to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.
• This Rs.50,000 Cr will comprise :
  1. Rs.25,000 Cr to NABARD for refinancing regional rural banks (RRBs)
  2. Rs.15,000 Cr to SIDBI for on-lending/refinancing small industries and
  3. Rs.10,000 Cr to NHB for supporting housing finance companies (HFCs)

4. Increase in Ways & Advances (WMA) Limit of States

RBI has increased WMA limit of states to 60% from 30% announced earlier on April 1, 2020. It will be available till September 30, 2020.

RBI’s Bazooka 2.0 – Regulatory Measures

1. NPA norm to exclude the moratorium period
   • 90-day NPA norm shall exclude the moratorium period. 
   • However, banks are required to maintain additional provisioning of 10% on standstill accounts.
2. No Dividends from Banks amid COVID-19-related economic shock
   • Banks shall not make dividend payouts from the profits pertaining to FY2019-20.
   • RBI shall review this restriction on the basis of financial position of banks for the quarter ending Sept-2020.
3. Liquidity Coverage Ratio (LCR)
   • RBI has brought down LCR requirement of banks to 80% from 100% with immediate effect.
   • LCR shall be restored to 90% by October 2020 & 100% by April 2021.
4. NBFC Loans to Commercial Real Estate Projects
   • Loans to Commercial Real estate projects delayed for the reasons beyond the control of promoters can be extended by an additional one year, without treating the same as Restructuring.
   • It is a big relief for both NBFC and Real Estate Sector

Key Outlook – Silver Lining

• Total Liquidity injection by RBI (6^th Feb 2019 to 27^th March 2020) into the economy is equal to 3.2% of GDP. It is mainly to de-stress Financial markets and has reflected in yields of bond markets.
• IMF projection of 1.9% GDP growth for India is highest in G-20 countries. India is likely to post a sharp V-shaped turnaround with 7.4% GDP growth in FY2022.
• Easing Inflation – CPI inflation for March at 5.9% down by 1.7% from January 2020 peak (7.59%). Food inflation also softened by 1.6%. Moving forward, inflation could decline further and settle below 4% by H2:FY2021.
• On April 15, 2020, IMD has forecasted by normal monsoon. There has been an aggressive Pre-monsoon kharif sowing across country. thus, favourable developments and outcomes can come out to boost rural demand.