RBI’s Move To Cut Reverse Repo Rate Unlikely To Bear Desired Results

Mumbai, April 17, 2020: The Reserve bank of India’s (RBI) yet another attempt to persuade banks to bring pace in their lending activity to the different industrial segments is expected to be non-starter in the post COVID-19 situation. The Central Bank may have reduced the Reverse Repo rate by another 25 basis points (bps) to 3.75 per cent, dis-incentivising the banks to park their additional funds with the RBI, it will be too much of optimism to expect banks’ lending to pick up because of this move. Though other measures announced by the RBI Governor Shaktikanta Das, to boost liquidity conditions, particularly for the Non-Banking Finance Companies (NBFCs), will prove to be a big bazooka with prudence and caution.

Dr. Joseph Thomas, Head of Research - Emkay Wealth Management said, “The RBI has reaffirmed its commitment to support the economy and the markets, and has announced an additional Rs.50,000 crore TLTRO (Targeted Long Term Repo Operation). This would be targeted at supporting corporate and smaller private entities. But the issue is there is no lending by banks nor any investment into sectors that require more support. Banks are parking with the RBI on a daily basis, an amount close to Rs. 6 lakh crore. So whatever money they have with them and whatever they are getting from the RBI, the banks are giving back to the RBI instead of investing it or lending it. The reverse repo rate cut is to discourage this reverse flow to the RBI. But it 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”.

He said, “The RBI has now specified where the money should go to encourage sectoral lending. Once a clear channelisation of credit to segments or sectors that require the support is achieved, the economy will get the much-needed stimulus."

The RBI’s relief package 2.0 announced on Friday is also expected to benefit NBFCs and the real estate sector as it is intended at easing liquidity concern of these sectors in a big way. 

Sundar Sanmukhani, Head of Fundamental research, Choice Broking said, “The RBI’s latest announcements to infuse liquidity and expand bank credit are expected to provide big relief to NFBCs as 50 per cent of the proposed TLTRO worth Rs. 50,000 crore will be invested in small and mid-sized NBFCs and MFIs. The Central Bank has also relaxed NPA recognition norms for NBFCs”.

Dr. V K Vijayakumar at Geojit Financial Services said, “The RBI has come out with announcements with far reaching beneficial consequences to the financial system. Refinancing of Rs. 50,000 crore to NABARD, SIDBI and NHB is another welcome move. The reclassification of NPA norms from 90 days to 180 days is a great relief to commercial banks. In brief, this is a big bazooka but with caution and prudence. Enhancement of Ways & Means Advances (WMA) to states by 60 per cent will be a relief to states stressed by the pandemic."

Reacting to the RBI’s announcements on Friday, Jaspal Bindra - Executive Chairman, Centrum Group said, “The RBI has shown pragmatism while announcing the second round of measures, aimed at maintaining liquidity and incentivising credit flows. Additionally, the 90 day NPA norm will not be applicable to loans where the moratorium is granted. This, along with a one year extension on loans given to the real estate sector will help preserve asset quality”.

Deepthi Mary Mathews, Economist, Geojit Financial Services, said, "In a span of 20 days, the RBI has announced the second round of liquidity boosting measures, with special focus on NBFCs and MFIs. TLTRO and reduction of reverse repo rate to 3.75 percent is expected to improve liquidity in the NBFC sector. Similarly, the loan given by the NBFCs to the real estate sector to get similar benefits as given by commercial banks is a support to both the NBFC and real estate sector.