RBI monetary policy review: Walking the extra mile

“It’s never crowded along the extra mile” - Wayne Dyer.

The RBI policy is best summed up in this quote. Since March 27, the RBI has acted proactively and ahead of time to contain the fallout of the Covid-19 pandemic.

First, we expect the terminal repo rate to be cut further by 100 basis points in the current cycle even after Friday’s rate cut. An aggressive cut in repo rate is the effective policy response to adjust the real rate as inflation is set to collapse in FY21. This will have a significant sobering impact on asset quality of banks, as RBI research shows.

This apart, the RBI has taken several regulatory measures on Friday to assuage the markets.

First, the relaxations to states will release an additional Rs 13,300 crore. Together with the normally permissible withdrawal, this measure will enable the states to meet about 45 per cent of their redemptions due in FY21 through withdrawal from Consolidated Sinking Fund. The ease in large exposure framework limits by 5 per cent will give additional headroom to the banking system, to lend to the large corporate groups having tier-1 capital of approximately Rs 12 trillion.

However, the most important measures are in lieu of extending the moratorium on term loans by another three months.

Additionally, for working capital deferment, with around 75 per cent of such debt rated A and above, the entities are expected to pay the accumulated interest as scheduled or to the funded interest term loan (FITL). We must appreciate that this in itself is a mini structuring that the RBI has announced and the current issue is more of a cash flow mismatch rather than an asset quality issue. We must endeavor to not allow this mismatch to degenerate into an asset quality issue.

The policy has also announced the extension of duration of loans for exporters that will help them in elongating their working capital cycle. Furthermore, efforts have been taken to provide greater flexibility to importers in managing their operating cycles and avoid unavoidable delays in movement of goods and documents in a Covid-19 environment.

So what next? We need to also appreciate that the 90-day NPA norm is not exactly suited to Indian conditions as the liability side of the Indian banking system has little market-based funding, unlike in the US. Furthermore, banks in the US have traditionally lent for working capital and not for term loans and infrastructure. In the US, the average working capital cycle lasts just 42 days, in India it’s around 66 days.

Thus a relaxation in such norms in current exceptional circumstances may be considered, but strictly with a well laid out calendar of returning to the current norm of 180 days as deemed appropriate by RBI.

In the end, we must appreciate that the current exceptional circumstances will need both fiscal and monetary blade of scissors to equally work in tandem. Its takes two to tango, isn’t it?


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