Overall, the RBI has delivered more than what was being expected and frontloaded a lot of the measures which markets were expecting to see if the economic situation visibly deteriorated. The liquidity measures are positive for the bond markets and wholesale funding channels. The measures also ease the financial burdens of the sector at risk(such as transport, hotel, restaurants, MSMEs, tourism, textiles, etc. as well as retail borrowers) from the Covid-19 impact. While the adverse implications of demand and supply contraction on the real economy remains, the RBI's decisions will help in easing any resultant financial dislocations as well as keep the funding channels working. We expect yields to lower significantly across the curve (more in the short to medium tenor) and contraction in spreads. The measures will ease the recent near freeze in the credit markets.
Rates. After the more-than-expected repo rate cut of 75 bps and surprise reverse repo rate cut of 90 bps, we believe there is scope for another 50 bps of further repo rate cut if the effect of Covid-19 lengthens and the growth prospects deteriorates.
Liquidity. Positive for overall liquidity which will lower rates, relatively more across the short-to medium tenors, and reduce the spreads in the market. (1) Targeted LTRO (TLTRO) equally split between primary and secondary markets for investment grade corporate bonds, CPs, NCDs along with HTM classification and exemption for large exposure framework will likely incentivize banks to invest in up to 3-year non-government securities. (2) CRR cut of 100 bps to 3% for a year will infuse primary liquidity of Rs1.37 tn along with increasing the money multiplier which will boost overall money supply in the system. (3) MSF increase to 3% from 2% will provide liquidity of Rs1.37 tn and will be useful for the relatively stressed banks.
Regulatory. Huge short term boost to all sectors with respect to financial burden through moratorium on all term loans (all financial institutions), deferment of interest payment on working capital facilities, and easing working capital financing through cash credit / overdraft. This will help all sectors at risk from the lockdowns to tide over the period with respect to their obligations to the financial sector.
We await the borrowing calendar of the government (likely on March 30) to understand: (1) any higher-than-expected borrowing, (2) direct deficit financing by RBI with respect to stimulus provided specifically for Covid-19, and (3) issuance of special securities to FPIs as per budget announcement.