Fitch Solutions says RBI may cut interest rates by 75 bps by March 2021
"In the light of a widening interest rate corridor as well as other aggressive monetary easing measures by the RBI, we have revised our expectations to 75 bps worth of cuts by March 2021, which imply a repo rate of 3.65 per cent and a reverse repo rate of 3.00 per cent," it said.
On April 17, the RBI 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.
"We believe 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," Fitch Solutions said in a note.
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.
"We believe that existing measures as they stand, are still insufficient to lift the Indian economy out of the current economic crisis brought about by Covid-19," Fitch Solutions said.
According to the RBI, TLTRO 2.0 was implemented as the deployment of TLTRO funds so far has largely been to bonds issued by public sector entities and large corporates, especially in primary issuances.
The disruptions caused by Covid-19 have, however, more severely impacted small and mid-sized corporates, including NBFCs and MFIs, in terms of access to liquidity, it said."We expect loan demand to 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 (April – March)," it said. ANZ ANSANS
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