HDFC Bank Treasury Research
Central Bank Watch: RBI to the Rescue
A day after the government announced a Rs. 1.7 trn fiscal stimulus, the RBI introduced its own
version of the stimulus package which includes a number of measures to ensure financial stability and
to stem the economic fallout from the spread of the coronavirus.
The RBI’s measures went beyond the market’s expectation, particularly in regards to the magnitude
of the policy rate cut (delivered 75bps, market expectations of 50bps) and the CRR (Cash Reserve Ratio)
reduction. In terms of forward guidance, the RBI highlighted its “whatever it takes approach” saying
that it would deploy all instruments – both conventional and unconventional tools – if required in the
While the repo rate cut delivered was sharp, transmission to borrowing costs for severely hit sectors
(such as aviation, hospitality etc.) could remain limited. That said, other liquidity infusion measures
(through CRR cut, MSF cut and TLTROs) are likely to be more supportive by pushing credit growth
and providing durable liquidity in the system. Moreover, the moratorium announced on the instalment
of term loans for three months is likely to cushion cash flow pressures for firms and individuals that
are reeling under the pressure of the 21-lockdown. The forbearance in terms of classification of these
loans is also likely to bring some relief in terms of NPAs for banks and NBFCs.
That said, the fact that unlike the Fed or the ECB, the RBI did not announce direct purchases of
corporate bonds or CPs and instead passed the buck on to the banks, is what could have led to the initial
market disappointment post the policy meeting. Moreover, it was disappointing to see no special credit
facilities for the worst hit sectors like aviation, hospitality etc. and an absence of direct liquidity support
for the NBFCs. Therefore, we think that a stimulus 2.0 could be required in the coming days to help
credit starved sectors if the usual monetary transmission levers are not as effective. Unprecedented
times warrant unprecedented measures.
On the macroeconomic outlook, the RBI refrained from providing estimates on growth and
inflation, given the uncertainty around the spread, intensity and duration of COVID-19.
Although, the central bank said that macroeconomic risks, both on the demand and supply side,
could be severe. On inflation, the RBI expects price pressures to soften going ahead given
dwindling demand conditions due to the lockdown and the drop in crude oil and food prices. We
expect GDP growth at 3.2-3.5% in FY21 down from 4.8% in FY20.
TREASURY RESEARCH 27 March 2020
Measures Announced : Summary
• The RBI went beyond market expectations and delivered an emergency rate cut of 75 bps, taking
the repo rate to 4.40% to lower borrowing costs
• The RBI reduced the reverse repo rate by 90 bps to 4.0%, increasing the policy corridor, to
discourage banks from parking money with the RBI. It also cut the CRR by 100 bps to 3.0% to
encourage credit deployment by the banks.
• The RBI announced a slew of liquidity measures to ease mounting liquidity pressures. The RBI
will infuse INR 3.74 trn liquidity on an aggregate basis into the financial system via TLTRO,
CRR and MSF (Marginal Standing Facility) to provide durable liquidity and push credit growth.
• The introduction of TLTRO (Targeted Long Term Repo Operations) is likely to provide banks with
liquidity for investment in commercial paper, investment grade bonds etc. reducing pressures
building up in the money markets.
• In regards to forbearance, the moratorium announced on payments of instalments on term loans
and deferment of interest on working capital loans for the next three months is likely to support
cash flow for firms as well as individuals.
• The RBI kept its stance accommodative and indicated it would maintain its position “as long as
necessary” to revive growth, signalling additional measures could be on the table.
Impact on the market :
The bond market reacted positively to today’s announcement and the 10-year gained by 7 bps, trading
at 6.09% at the time of writing (from today’s opening level of 6.16%). The USD/INR opened higher
at 74.49 and rallied to 74.35 soon after the RBI announced measures to support the economy before it
gave up its gains and was trading weaker at 74.80 at the time of writing. We expect the USD/INR to
trade in the range of 74.5-76.0 in the near term.
The specifics :
• Policy Rate: In line with other major central banks, the RBI today announced an emergency rate
cut of 75 bps, taking the repo rate to 4.40% from 5.15% ahead of its scheduled meeting on 3rd April.
While the committee unanimously voted for a rate cut and maintained accommodative stance,
members differed in magnitude of rate cut, with 2 members voting for a 50 bps rate reduction.
o In addition to the repo rate cut, the central bank also increased the policy corridor
(difference between MSF rate and reverse repo) to 65 bps from 50 bps previously. As
a result of which while reverse repo rate is reduced to 4.0% (a reduction of 90 bps),
MSF rate is reduced to 4.65% from 5.40% previously.
• Liquidity: The RBI also announced a slew of liquidity measures to ease mounting pressures. The
RBI will infuse INR 3.74 trn liquidity on an aggregate basis into the financial system.
o TLTROs: The RBI shall conduct term repos of up to three-year tenors of appropriate sizes
for up to a total amount of Rs 1,00,000 crore at a floating rate, linked to the policy repo
rate. The central bank has directed banks to deploy the liquidity availed in this scheme in
investment grade corporate bonds, commercial papers and non-convertible debentures,
which be classified as held to maturity (HTM) investment.
o CRR (cash reserve ratio): Reduction in CRR of all banks by 100 bps to 3% from 4%, with
effect from March 28 for one year. This is likely to release primary liquidity of INR 1.37
trn in the financial system. The RBI also reduced the minimum daily CRR balance from
90% to 80%, effective March 28 (up to 26-Jun-20).
o MSF (Marginal Standing Facility) provision which allows banks to borrow from the
central bank in case of liquidity crunch is increased to 3% of SLR from 2% currently with
immediate effect until 30-Jun-20. This measure is expected to provide an additional
liquidity of INR 1.37 trn to the banking system under the LAF window.
• Bank Loan Forbearance: Moratorium on repayments of instalments on term loans by the
borrowers and deferment of interest on working capital loans for the next three months
announced. Availing such a moratorium would not lead to downgrade in an individual’s credit
rating or affect the classification of the loan. That said, availing moratorium does not entail any
changes in the existing terms and conditions of the loan. At this point it is not clear whether
borrowers will have to pay any interest on the loan at a later date for the 3-month period.
Measures announced previously by the RBI:
• Tweaks to the Liquidity Management Framework: The RBI removed the daily fixed repo and
four 14-day repos conducted every fortnight. Instead, the variable 14-day repo/reverse repo
would be the main liquidity management tool.
• Introducing LTROs (Long Term Repo Operations) to improve transmission and supplying
durable liquidity: The RBI shall conduct term repos of one-year and three-year tenors of
appropriate sizes for up to a total amount of Rs 1,000bn at the policy repo rate.
o 5 LTROs between 17-Feb to 18-Mar-20, for 1-year and 3-year tenors amounting to INR
1.25 trn at fixed repo rate
• Open Market Operation: The RBI announced to conduct purchase of government securities
worth INR 300 Bn in March 2020.
• Two six-month US Dollar sell/buy swap auction providing dollar liquidity worth USD 2.71 bn.
The disappointments: What wasn’t announced?
• Growth and Inflation outlook: The RBI refrained from giving growth and inflation forecast amidst
heightened volatility, unprecedented uncertainty and extremely fluid state of affairs. The MPC
reckons that the growth number and inflation print would be heavily contingent on the intensity,
spread and duration of COVID-19.
• Unlike the Fed and the ECB, the RBI did not announce direct purchases of corporate bonds.
Besides, no sectoral facilities for the worst hit sectors like aviation’s, hospitality, etc. were
The RBI increased the policy corridor to 65 bps CRR Ratio is reduced to 3% from 4%
Source: RBI, HDFC Bank Source: RBI, HDFC Bank
Repo Reverse Repo MSF (in %)
increased to 65
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
(in %) CRR Rate
CRR rate has
after 7 years
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