As I promised I will be writing a daily blog till the crisis lasts so as to try and give a perspective on the way I see things and hopefully help some investors in the bargain. I did not put it out in the morning today as early morning there was an announcement that the RBI Governor will be speaking and it made no sense speaking before that. Now before I come to the steps that the RBI took some key developments globally
- Cases in China and South Korea continue to moderate and the new cases are just 25% of the recoveries of Covid19 in these countries now giving all of us hope on the way this could play out elsewhere also eventually
- The G20 met via Videoconferencing and all countries promised coordinated action which is very much required at this stage and a promise of a $ 5 Trillion stimulus. Nearly $ 2 Trillion of this will come from the USA itself and many other countries have also announced and announcing now
- In a rare interview the US Fed Chairman came out and gave a publicly telecast interview . This had an impact of assuaging nerves all around. The rally in the US Dollar which had started to create liquidity crisis globally also reversed and the USD Index has given up 3.5% over the last two days thus indicating reduced pressure. The INR has also bounced by 2% over the last two days
- In India the Covid19 cases have risen but not exponentially. This was expected as many people came in between the 10th to 22nd of March from high risk countries. However I am still hopeful that will the Social Distancing norms that are in place for the next 20 days and the onset of summers this will be contained
- The Finance Minister announced a package yesterday which was welcome. The actual quantum though will be lesser than Rs 170000 Cr as the Kisan Scheme advance payment is just a preponement and even for the construction workers it just comes out of an already setup corpus. The good parts were the PF Contributions for small companies, Rs 500 into Jan Dhan accounts of women, contributions for the elderly as well as free LPG for 3 months. My guess of the actual package is around Rs 110000-120000 Crores
- FII Selling seems to be moderating now
Now lets talk of the RBI action which is very significant
- RBI has reduced the policy rates by 75 basis points and reduced the Reverse Repo rate by 90 basis points which is very significant as it gives the banks incentive to lend rather than park with the RBI. The Reverse Repo rate is now lower than the Savings Bank Rate of most banks and as such they will be incentivized to lend more when things normalize and the economy opens up
- RBI has cut the CRR by 100 basis points. This is very significant as this money just lies with the RBI getting no returns for banks. The total quantum of this will be nearly Rs 137000 Crores. It reduces costs for banks and provides more ammunition to lend at lower rates when things normalize
- RBI announced LTRO of Rs 100000 Crores . This is essentially a borrowing against securities which the banks can do from the RBI at effectively the Repo rate. This time they have made it specific that this borrowing will need to go into investment grade corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020This will help reduce bond spreads, if not immediately eventually and improve the functioning of the lending markets
- RBI also decided to increase the borrowings that banks can do via the Marginal Standing Facility from the RBI by Rs 137000 Crores. This can also increase potential liquidity. However in the near term it might not be of much use as banks have enough liquidity
- RBI has deferred the recognition of NPA’s on term loans (which will also include retail loans, housing loans etc) for three months i.e. if you don’t pay it doesn’t become an NPA. Also if interest rates on working capital loans are not paid then that will also not be taken as a default till 30th June. Now if you have a housing loan and you don’t pay EMI’s for they next three months banks effectively should not get after you and the credit score will also remain intact. However those who can pay should ideally pay as it is just a deferment. For corporates and small businesses it will be a relief. Besides this there are measures on easing of working capital limits.
On an overall basis I believe that the actions taken by the RBI are extremely positive. Government measures were decent but they need to do much more.
Globally the markets seem to have made a bottom in extreme panic and actions by Monetary and Fiscal authorities are having a positive impact while real economies are still shut to a great extent due to Covid19. Markets could now get into moving in a less volatile range over the next two weeks. If the Covid cycle gives indications of peaking out over the next 2-4 weeks we could see a significant market rally driven by various policy steps. The effectiveness of steps taken by RBI should not be gauged by the market reaction today. It’s a very good policy response. Now over to the Government