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Finally,Targeted Measures By RBI Amid Economic Pandemic-- Liquidity Infusion

Announcement that Macroeconomic landscape has deteriorated since March 27, 2020 and over the panicked voices from the financial and industrial institutions, RBI has started addressing the sector-wise concerns and targeted infusion of cash in to the Indian economy.

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Quoting the IMF’s global growth projections that in 2020, that the global economy is expected to plunge into the worst recession since the Great Depression, far worse than the Global Financial Crisis, RBI Governor Shaktikanta Das has announced the measures to target liquidity provision to sectors and entities which are experiencing liquidity constraints. And if not too late, RBI has finally looking into much desired ‘Targeted Measures’. 

“Another TLTRO auction of `25,000 crore will be conducted today,” Governor said in addition to the announcement on March 27,  where RBI undertook three auctions of targeted long term repo operations (TLTRO), injecting cumulatively `75,041 crore to ease liquidity constraints in the banking system and de-stress financial markets.

Responding to the announcement, Umesh Revankar, MD & CEO, Shriram Transport Finance welcomed the RBI to infuse liquidity into the system said: "We would appreciate if banks reciprocate positively to NBFCs  request on moratorium to manage cash flow smoothly. All in all we think it is a positive step taken by the RBI  to overcome the challenges faced by the economy.”

Another important announcement came from RBI through capital support of  Rs 50,000 crore  for National Housing Bank (NHB), National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI). Out of the total budget of Rs 50,000 crore, Rs 25,000 crore will go to NABARD, Rs 15,000 to SIDBI for providing refinancing to banks for SME loans and Rs 10,000 crore to NHB for refinancing housing finance companies which is an indirect way of supporting agriculture, small industry and housing companies.

On Thursday, Public sector banks (PSBs) flagged concerns over loans worth over Rs 50,000 crore turning into non-performing assets (NPAs) for March, as the Reserve Bank of India (RBI) rejected a request for standstill in the asset classification. And it is important to note that banks have to start pumping credit into the market from April 20.

In addition, RBI Governor Shaktikanta Das announced a reduction in reverse repo rate by 25 basis points from 4 per cent earlier to 3.75 per cent now. Responding on the measures taken by RBI on Friday, Shishir Baijal, Chairman & Managing Director, Knight Frank India said: “The move on reduction of reverse repo rate by 25 basis points shall push banks to open up the credit flow to economic activities. Similarly, allowing a 90 day extension for asset classification to loans that have been granted moratorium window is a critical step to assuage credit quality concern of lenders. Considering the lockdown and the impact on migrant labour workforce, there will be an inevitable delay in construction activity in real estate projects."

 Along, the stress over asset classification, the central bank has provided one year project completion extension on asset classification for NBFC loans to CRE segment. Considering NBFCs have been very active in this segment, this announcement will ease the pressure of this segment too Baijal pointed out. 

But the challenges remain as Joseph Thomas, Head of Research - Emkay Wealth Management analyses further responded: “as the reverse repo rate cut is to discourage thus reverse flow to RBI. But is doubtful whether this flow can be stemmed easily. Banks are not lending or investing because they fear that under the current conditions they may be adversely impacted if they employ the money for investments or lending. Even three months back the approach of the banks was one of extreme caution.” So in terms of the realization of such measures, RBI has now specified where the money should go to encourage sectorial lending. He adds: “Once a clear channelization of credit to segments or sectors that require the support is achieved, the economy will get the much-needed stimulus.”

After the RBI announced today's press conference through a tweet in the morning, the markets gave a thumbs up as BSE Sensex climbed by more than 1,000 points ahead of the governor's address. Amid such a gloom, the highlight that the level of foreign exchange continues to be robust at $476.5 billion that is equivalent to 11.8 months of imports brings some good read. 

Additional measures announced by the RBI governor in his address today:

  • Liquidity management: Will undertake TLTRO 2.0 operations. LTRO of Rs 50,000 cr to begin with in many tranches for NBFCs
  • From February 6 till March 27, the RBI had injected liquidity worth 3.2 percent of GDP. The systemic liquidity absorption at Rs 4.36 lakh crore during March 27-April 14. 
  • Banks won't announce dividends until further notice
  • 60% of ways and means advances allowed to states until September 30, 2020
  • NPA classifications will exclude the three-month moratorium period till May-end
  • NBFCs allowed to grant relaxed NPA classification to their borrowers
  • Banks will need to maintain additional provisioning of 10 per cent on standstill accounts
  • Oil: Global financial markets remain volatile with crude oil prices in a state of flux despite production cuts by OPEC plus countries.
  • NBFCs' loans to delayed commercial real estate projects can be extended by a year without restructuring.