In this pandemic period, Reserve Bank of India unleashed a slew of measures to help the economy. Targeted long-term repo operations 2.0 of Rs 50,000 cores have been announced. Banks would be required to deploy at least 50 percent of funds available under this facility in bonds to smaller Non-Banking Financial Companies(NBFCs) and Micro-Finance Institutions(MFIs).
This will be helpful to reduce the funds channelized only to the top rung NBFCs and to ensure them the more equitable distribution of liquidity. Also, as a further relief, Reserve Bank of India, has reduced the liquidity coverage ratio that banks are required to comply with to 80 percent from 100 percent. And this will help to reduce the supply of SDLs in the near term and help cool off yields.
Also, non-performing asset(NPA)classification norms for NBFCs have been relaxed by RBI. Banks have been restricted from further disbursing dividends for FY20. Also, funding lines for NABARD, SIDBI, and NHB has been extended to Rs 25000 crore, Rs15000 crore, and Rs 10000 crore and are announced at repo rates so that these institutions can also lend at more competitive rates, thereby ensuring transmission.
To disincentivize banks from parking funds, with the RBI, a cut in reverse repo by 25bps to 3.75 percent is intended to incentivize them to lend to the real economy. Combination of measures to boost liquidity, improve monetary transmission, and relax repayment schedules is the need of the hour in which RBI has been proactive and repeatedly insisting that they would do whatever it takes. This provides much-needed liquidity and positive messages for NBFCs, and a much elaborate stimulus package is awaited.
Since the measures announced were more towards a short-term liquidity measure, the rupee did not react much.A lot of forwards are getting canceled by companies that have not been able to deliver documents against their exports. The custodian banks have been buying US dollars lately. We are still not out of the woods concerning the pandemic globally and emerging market currencies like Rupee may not find buyers at least in the short term.
