RBI lines up 'arsenal' of liquidity measures to counter Covid-19 impact

As the coronavirus pandemic and the ongoing nation-wide lockdown is set to severely impact India's economic activities and growth, the Reserve Bank of India (RBI) on Friday came out with a number of measures to ensure adequate liquidity flow in the system and support businesses.

Addressing media through a video statement, RBI Governor Shaktikanta Das said: "The time has now come for the Reserve Bank to unleash an array of instruments from its arsenal to staunch and mitigate the impact of maintain revised rules and, above all, preserve financial stability."

In a big relief to the corporate sector, the central bank has allowed a three month moratorium on payment of installment in respect of all term loans outstanding on March 1, 2020. It also announced deferment of interest payment on working capital loans by three months.

The twin move is expected to reduce pressure on both creditors and borrowers as the former gets relief on qualifying loans as NPAs and thereby increase provisioning for a period of three months. For borrowers facing disruptions on account of Covid-19 pandemic, the RBI move provides more time to settle their dues.

The Statement on Developmental and Regulatory Policies, read out by the Governor, is to directly address the stress in financial aims at expanding liquidity, reinforcing monetary transmission, relaxation of repayment pressures and improving access to working and improving the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic.

Among the liquidity measure, Das announced that the bank would conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.

Liquidity availed under the scheme by banks has to be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020.

The first Targeted Long Term Repo Operation auction will be held on Friday and following a review of the outcome of this auction, the subsequent TLTRO auctions will be announced.

Further, a one-time measure to help banks tide over the disruption caused by Covid-19, the RBI decided to reduce the cash reserve ratio (CRR) of all banks by 100 basis points to 3 per cent of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28, 2020.

This reduction in the CRR would release primary liquidity of about Rs 1.37 lakh crore uniformly across the banking system in proportion to liabilities of constituents. This dispensation will be available for a period of one year ending on March 26, 2021.

"Furthermore, taking cognisance of hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements, it has been decided to reduce the requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per cent effective from the first day of the reporting fortnight beginning March 28, 2020," it said. This is a one-time dispensation available up to June 26.

Currently, under the marginal standing facility (MSF), banks can borrow overnight at their discretion by dipping up to 2 per cent into the Statutory Liquidity Ratio (SLR). Now, the RBI has increased the limit of 2 per cent to 3 per cent in view of the exceptionally high volatility in domestic financial markets.

This measure is intended to provide comfort to the banking system by allowing it to avail an additional Rs 1.37 lakh crore of liquidity under the LAF window.

The three measures relating to TLTRO, CRR and MSF will inject a total liquidity of Rs 3.74 lakh crore to the system.

On the financial markets, it was decided to permit banks in India which operate International Financial Services Centre (IFSC) Banking Units (IBUs) to participate in the non-deliverable forward market (NDF) - the offshore Indian rupee market with effect from June 1, 2020.

Banks may participate through their branches in India, their foreign branches or through their IBUs, it said.

The highlight of the day, however, was the 75 bps repo rate cut to 4.4 per cent.

These moves are likely to soothe the business fraternity and support the liquidity requirements. A rate cut by the RBI has been long called for and with the 21-day lockdown, the rate cut and the other measures became all the more necessary.

About the economic outlook, Das said that parts of the global economy may slip into recession and noted that the Monetary Policy Committee refrained from giving an outlook on inflation and growth due to the ongoing uncertainty.

"In fact, this kind of uncertainty has never been seen before," he said. IANS