ET View: RBI should better target liquidity injection

It is welcome that the Reserve Bank of India (RBI) has announced a series of measures to inject liquidity in the financial system, declared a moratorium on repayment of term loans and has reduced its key policy rate, by which it signals the cost of funds for banks, by 75 basis points or 0.75%, to reduce the repo rate to a record low of 4.4%.

But the steps announced may not go far enough to address the ground realities against the backdrop of the nationwide lockdown.

The central bank is not directly purchasing corporate bonds of large enterprises and major non-bank finance companies (NBFCs), as is par for the course in the mature markets. Instead, RBI has announced long-term repurchase obligations or repo in government securities with banks, so that the latter can then use the liquidity available to subscribe to corporate bonds or commercial paper or debentures.

Note however, there is ample inter-bank liquidity available; banks have been parking close to Rs 3 lakh crore on a daily basis in March with the central bank. Liquidity injections need better targeting.

RBI surely needs to reconsider directly buying corporate bonds, so as to purposefully address liquidity conditions in stressed segments like NBFCs. In tandem, we need an enabling policy environment for an active and liquid corporate bond market. It would boost modern arm’s length finance for long-gestation infrastructure projects.

It is reassuring that RBI governor Shaktikanta Das has reiterated that, “all instruments – conventional and unconventional—are on the table.”

RBI’s proactive move to reschedule repayment of term retail- and commercial loans for three months, March to May, and allow deferment of interest on working capital as well, would provide much-needed relief for corporates, MSMEs and individuals.

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It is also significant that the reverse repo rate, the rate at which banks can park short-term funds with RBI, has been slashed by 90 basis points, to 4%. The policy objective is to discourage banks from passively depositing with RBI, and instead to provide loanable funds.

The monetary policy measures taken today would inject Rs 3.74 lakh crore liquidity in the system, which is about 1.8% of India’s GDP. These include targeted long-term repo operations for Rs 1 lakh crore, reduction in the cash reserve ratio (CRR) for banks by 100 basis points to 3% of net demand and time liabilities, which would release liquidity to the extent of Rs 1,37,000 crore in the banking system.

Further, RBI is to step-up liquidity comfort for banks to better manage attendant stress, by providing accommodation from the Marginal Standing Facility: from 2%

of statutory liquidity ratio holdings to 3%, which would add a further Rs 1,37,000 crore.

Besides, the regulatory go ahead for select banks to take part in the offshore rupee derivatives market from June 1, the Non-Deliverable Forward (NDF) market, is path-breaking as well.

An active corporate bond market also calls for liquidity in routine risk management instruments like currency and interest-rate derivative products to better manage a panoply of market risks.



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