Noting that existing monetary easing measures are still insufficient to lift the economy out of the economic crisis brought about by the Covid-19 outbreak, and softening inflationary pressures will allow for the implementation of more easing measures according to Fitch Solutions.
It expects the Central Bank, The Reserve Bank of India (RBI) to cut interest rates by 75 basis points by March 2021 as monetary easing measures till now are insufficient to lift the economy reeling under the stress of coronavirus pandemic.
Last week, on April 17, the RBI had announced a range of additional liquidity enhancing measures aimed at supporting credit flow to the economy. These measures included a 25 bps cut to its reverse repurchase (repo) rate to 3.75 per cent to lower the incentive for banks to park their surplus funds with the central bank. The policy repo rate was left at 4.40 per cent.
Other measures announced by the RBI on April 17 included targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of Rs 50,000 crore. The funds availed by banks under TLTRO 2.0 will have to be invested in investment grade bonds, commercial paper, and non-convertible debentures of non-bank financial companies (NBFC), with at least 50 per cent of the total amount going to small and medium-sized NBFCs and micro-finance institutions (MFI).
In addition, banks have to make these investments within one month from receiving the funds from the RBI.
Also, it reduced the liquidity coverage ratio to 80 per cent, from 100 per cent previously and provided a special financial facility of Rs 50,000 crore to All India Financial Institutions (AIFIs) at the repo rate.
Besides, an increase in the amount state governments can borrow was allowed by further increasing the ways and means advance (WMA) limit for states by 60 per cent on top of March 31 levels until September 30, up from a 30 per cent increase announced on April 1.
RBI also relaxed the 90-day non-performing asset (NPA) classification norms for accounts being granted the three-month loan moratorium announced on March 27. However, an additional loss provisioning of at least 10 per cent of the total of these accounts have to be made, to be phased over two quarters (quarters ending March and June 2020) at no less than 5 per cent per quarter.
Fitch states the loan demand will remain subdued amid a weak economic outlook, as small and medium-sized businesses continue to go out of business and larger corporates defer their capital expenditures for FY2020/21.