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Please refer to important disclosures at the end of this report
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Monetary Policy Committee (MPC), in it’s bi monthly MPC meeting reduced Repo
rate & Reverse Repo rate by 40bps to 4% & 3.35%, respectively, and maintained
an accommodative stance.
Post Covid 19 outbreak, RBI advanced it’s MPC meeting twice and lowered Repo
rate by total of 115bps (i.e. on March 27, 2020 by 75bps and May 22, 2020 by
40bps) along with other regulatory measures in order to support the economy. In
the latest policy announcement, the RBI has tried to address liquidity issues of
MSME, state Governments, exporters and importers, along with extending
moratorium on term and working capital loans by another 3 months.
Further, RBI only gave directional guidance on inflation and economic growth and
refrained from giving any numerical projections. RBI also noted the deterioration
in economic growth prospects and acknowledged negative GDP print for FY21.
RBI expects headline inflation will fall below 4% over Q3FY21 and Q4FY21.
Hence, overall risks to growth are severe while those to inflation may be
temporary. However, on positive side, kharif sowing is robust.
Moratorium extended for 3 months: In order to ease financial stress, the RBI has
allowed extension of moratorium on term loans by an additional three months till
August 31, 2020. Similarly, RBI has also allowed deferment of interest on working
capital facilities for another three months till August 31, 2020 and considering
lockdown led strain on cash flow, it allowed accumulated interest to be converted
into a term loan and repayable by the end of FY2021
Measures to improve the functioning of markets
Special Refinancing facility of `15,000cr to SIDBI extended by additional 90
days.
Additional duration (extension of 3 months) to meet investment limit by FPI
under Voluntary Retention route (VRR).
Measures to support exports and imports
Increase in export credit sanctioned by banks from existing one year to 15
months, for disbursements made up to July 31, 2020.
Liquidity Facility to Exim Bank of India of `15,000cr for a period of 90 days.
Extension of time for payment for normal imports from six to twelve months.
Measures to ease financial stress
Moratorium extended by 3 months on term loans till August 31, 2020.
Accumulated interest on working capital facilities will be converted into a
funded interest term loan which shall be repaid in current FY21.
Extension of resolution timeline.
Group exposure limit increased from 25% to 30%.
Measures to ease State Government financial stress
Ease financial stress of state governments by relaxing the rules governing
withdrawal from Consolidated Sinking Fund (CSF).
Monetary Policy Review – May 2020
Another off cycle rate cut
Monetary Policy Review | Banking
May 23, 2020
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Monetary Polycy Review
May 23, 2020
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OurTake: We believe RBI has been taking calibrated move and responding to the
evolving situation, like announcing extension of moratorium for another 3 months
and other supporting measures. However, investors were also expecting an
announcement of a comprehensive restructuring of loans. We opine that RBI will
come up with one-time restructuring once the lockdown is lifted. Any successful
restructuring requires some certainty of cash flow, hence, once the lockdown is
lifted, RBI will have better understanding of the cash flow position of every sector
and accordingly will announce restructuring plans.
All measures by RBI are intended towards easing the funding pressures and
liquidity provided by RBI to banks ideally be addressing the liquidity issues of
stressed segments of the economy. However, banks are parking excess liquidity of
over `7 lakh cr with the RBI, which clearly indicates little demand for credit and
heightened risk aversion among the banks. Rate cut would not immediately
improve credit off take for banks given the lack of economic activity, negative
growth prospects coupled with the reluctance of corporates to add debt in present
scenario. Hence, everything depends on when the lockdown will end and
economic activity resumes.
We expect extension of moratorium could have negative impact on financial
institutions. It could lead to lower collection, as cash flow of borrowers would not
improve immediately once economic activity resumes. Consequently, it will impact
asset quality. Additionally, there is a risk of credit culture being affected due to a
prolonged moratorium period. Hence, we expect higher slippages and provision
costs in FY21.
Exhibit 1: Repo rate lowerd 115bps in last two months
1
2
3
4
5
6
7
8
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Repo rate
Reverse Repo rate
CRR
Source: Company, Angel Research
Exhibit 2: 10 year G-sec Movement
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Nov-17
Feb-18
May-18
Aug-18
Nov-18
Feb-19
May-19
Aug-19
Nov-19
Feb-20
Source: Company, Angel Research
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Monetary Polycy Review
May 23, 2020
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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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