"The RBI has cut the key policy rates by 40bps in the bi monthly meeting of the MPC. Post the Covid 19 outbreak the Repo rate has been reduced by 115 bps to 4.4% while the Reverse repo rate has been reduced by a total of 155bps to 3.35%. In it's assessment of the economy the RBI expects a negative growth rate for the economy in FY2021 with risks on the downsides and therefore has decided to continue with it's accommodative stance for as long as required which indicates more rate cuts down the line subject to inflation cooling off. In order to ease financial stress the RBI has allowed extension of moratorium on term loans by an additional three months till 31st of August 2020. Similarly the RBI has also provided relief to businesses the RBI has allowed deferment of interest on working facilities for another three months till the 31st of Aug'20 which will be converted into a term loan to be repayable by the end of FY2021.
The RBI has also taken a series of measures to address the issues for the EXIM sector and has announced various measures in order to ease the stress on the sector including increase the maximum permissible period of pre-shipment and post-shipment export credit along with extending liquidity facility to the EXIM bank of India of INR 15,000 cr. The RBI has also tried to address the issues of MSME's by extending the INR 15,000 cr. refinancing facility provided to SIDBI by 90 days.
While the rate cuts and other liquidity measures along with forbearance should provide some relief to the economy the new 10 year G-Sec paper is currently trading at ~5.7% which signifies a spread of ~170bps over the repo rate which is very high as compared to normalized spread of ~75bps. The unusually high spread between the overnight rate and the 10 year G-Sec rate is not allowing full transmission of the rate cuts so far as markets are concerned over Government borrowings in FY2021 given the likelihood of a very large fiscal deficit. Given the surplus liquidity in the system of over ~7 lakh cr. which is parked with the RBI through the reverse repo window we believe that the need of the hour is for the RBI to undertake more unconventional policy measures like operation twist which can help push down the long term G-Sec rates and help bring down borrowing costs for consumers and businesses."
