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SEVENTH BI-MONTHLY MONETARY POLICY: FIRING A BAZOOKA AND REARMING FOR MORE

28 Mar 2020

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  •  With the 90 bps reduction in Reverse Repo Rate (RRR), what the RBI has essentially done is that it has forcefully lowered the floor, so that the call money rate remains well over it
  • While the Repo rate now stands at 4.4%, the Reverse Repo rate is pegged at 4%
  • The slashing of the Cash Reserve Ratio (CRR) by 100 bps comes next with the ratio now standing at 3%
  • The third liquidity measure pertains to the Targeted Long Term Repo Operations (TLTRO) under which the RBI will conduct auctions of targeted term repos with a tenor of up to 3 years
  • Increasing MSF limit to 3% of SLR from the prevailing 2%, is the fourth liquidity measure initiated by the RBI
  • Collectively, the three liquidity measures will infuse the aforementioned Rs. 3.7 lac crore of liquidity
  • RBI has announced it’s ‘whatever it takes moment’ with a bang


The monetary policy committee (MPC) has fired a bazooka in the midst of a war like crises – infusing Rs. 3.7 lac crore of liquidity into the system. As part of the package, the MPC has initiated several instruments of liquidity. First relief comes by way of rate cuts to the tune of 75 bps and 90 bps for Repo and Reverse Repo, respectively. Consequently, while the Repo rate now stands at 4.4%, the Reverse Repo rate is pegged at 4%. The slashing of the Cash Reserve Ratio (CRR) by 100 bps comes next with the ratio now standing at 3%. The RBI notes that this 100 bps reduction will unleash Rs. 1.37 lac crore worth of incremental liquidity into the system. This liquidity measure will be in excess of the non SLR HQLA and comes into force on the 28th of March 2020.

The third liquidity measure pertains to the Targeted Long Term Repo Operations (TLTRO) under which the RBI will conduct auctions of targeted term repos with a tenor of up to 3 years and linked to a floating Repo rate. The exercise will unleash Rs. 1 lac crore of liquidity in the system; as a condition, this money has to be used by banks to purchase investment grade corporate debt (bonds, NCDs and CPs). Once purchased, the debt has to be classified as Held Till Maturity (HTM). The classification is said to hold even in situations where the HTM category threshold exceeds 25% of total investments held.

Increasing MSF limit to 3% of SLR from the prevailing 2%, is the fourth liquidity measure initiated by the RBI. The extra 1% extension under the MSF facility is said to unleash Rs. 1.37 lac crore of liquidity in the system and will continue until the 30th of June. Collectively, the three liquidity measures will infuse the aforementioned Rs. 3.7 lac crore of liquidity. Critical Basal III requirement pertaining to the last tranche of the Capital Conservation Buffer (CCB), which forms a critical bulwark at the time of stress is also being put in abeyance. Accordingly, the deadline of the CCB’s 0.625% tranche is now being extended to September 30th from the erstwhile March 31st. Apart from comforting the banks, the RBI has also taken measures to calm the demand side. These measures include easing working capital financing norms (moratorium on Covid -19 related downgrades) and deferment of interest payment.

Perhaps the most important yet less talked about move was the reduction of 90 bps in RRR. It was indeed unexpected as the MPC decided to lower the RRR beyond the usual 25 bps differential with the Repo rate. The 15 bps additional relaxation has a much deeper meaning in the larger scheme of things.

We believe that today’s move by the RBI is to buy ammunition for future monetary loosening and therefore most of the Rs. 3.7 lac crore infusion will help in normalizing the policy corridor. The systemic liquidity is anyway in excess (especially due to the low credit deposit ratio) and recently banks have been parking Rs. 3 lac crore with the RBI daily under the reverse repo facility (LAF window) earning 4.9% along with better yielding GSecs in return. This during the time when average call money rate is almost similar to reverse Repo rate. In short, banks have absolutely no incentive to lend each other at the moment. With the 90 bps reduction in Reverse Repo Rate (RRR), what the RBI has essentially done is that it has forcefully lowered the floor, so that the call money rate remains well over it.

Clearly the RBI decision to preponed the monthly policy meeting given the urgency of it all. These measures were necessary to stabilize the economy at a time when emergency like situation prevails in the country. Also, given the fact that the fiscal side had unleashed its firepower yesterday, a reoriented monetary policy was required in order to have closer fiscal-monetary coordination. Concluding, while the MPC (and the RBI in general) did not say much about the economy’s outlook based on several macro variables and for that matter what it will do next, it is sure announced it’s ‘whatever it takes moment’ with a bang.