RBI MEASURES IMPRESS MARKETS

The morning of Friday, April 17, had a déjà vu feeling, as on March 27, another Friday, when news channels flashed that Reserve Bank of India (RBI) Shaktikanta Das would address the media at 10 a.m.

The markets were surprised. They had been expecting finance minister Nirmala Sitharaman to make an appearance with her second fiscal stimulus package. More support measures were overdue what with the 21-day lockdown which began on March 22 turning out to be not enough and the government deciding that it be extended till May 3.

The RBI’s ‘Bazooka 2.0’ on Friday included a reduction in the reverse repo rate by 25 basis points (bps), or 0.25%, to 3.75% from 4% earlier. The RBI also announced a new targeted long-term repo operation (TLTRO) of ₹50,000 crore aimed at small and mid-sized non-banking financial companies (NBFCs) and micro-finance institutions (MFIs), calling it the first tranche, with keenness to increase the size of these operations in future.

Further, the central bank announced special refinancing facility of ₹50,000 crore to development financial institutions; ₹25,000 crore for Small Industries Development Bank of India (SIDBI), ₹15,000 crore for National Bank for Agriculture and Rural Development (NABARD), and ₹10,000 crore for National Housing Bank (NHB).

Also, the Ways and Means advances to the state governments have been increased by 60% through September 2020.

Das also announced that RBI had directed a pause on banks’ asset classification till May 31, and, for assets currently under resolution of stressed assets, the governor suggested a further 90-day extension for asset recognition, thus giving banks a moratorium on non-performing assets’ (NPA) classifications, thus offering some additional forbearance.

The RBI also announced a sharp reduction in banks’ liquidity coverage requirement (LCR), from 100% to 80%. Das suggested that the LCR would be returned to ‘normal’ in a phased manner, back to 90% from October 1 this year, and to 100% by March next year.

The net effect of RBI’s second bazooka was positive on the equity markets. The S&P BSE Sensex and NSE Nifty 50 touched their day’s high at 31,718.73 and 9,324 respectively. Adding over 1,116 points (+3.65%) and over 331 points (+3.68%) to their previous day close values of 30,602.61 and 8,992.8 points respectively.

Positive sentiments also reflected in the benchmark indices’ Friday lows—at 30,960.9 and 9,091.35 respectively. The Sensex and the Nifty 50 were higher by over 358 points (+1.17%) and over 98 points (+1.10%) each, over their Thursday close. At close, the Sensex and the Nifty 50 added over 986 points (+3.22%) and over 273 points (+3.05%) compared to their previous day close.

The same positive rigour was seen in the S&P BSE MidCap and SmallCap which, compared to Thursday’s close were higher by 3.22% and 2.84% each at Friday’s high and 0.84% and 1.62% higher at Friday’s low. The respective indices added over 245 points (+2.12%) and over 257 points (+2.44%) at Friday’s close.

“Today’s RBI moves could be considered as incremental, and stopped short of announcing major bond buybacks or delivering another repo rate cut, despite rising evidence of a deteriorating growth backdrop,” Rahul Bajoria, chief India economist at Barclays, opines.

“Hence, we do not think the RBI is done and expect further additional liquidity measures and steps to mitigate downside growth risks, as more clarity on fiscal steps becomes available, possibly in next few days,” Bajoria adds. He expects the central bank to deliver the next round of easing in next two to four weeks, as more data becomes available and see it reducing the benchmark repo rate by a further 90 bps (0.90%) by third quarter of 2020.

According to Vinod Nair, head of research at Geojit Financial Services, markets were buoyant following RBI measures. “The positive global markets also added to the buoyancy,” says Mishra. “Focus will continue to be on how far these measures will help in containing the economic fallout of the virus and also on the earnings guidance of companies."

While the equity markets were booming on Friday, the woes over the scale of economic fallout due to Covid-19 pandemic led the rupee to fall and record a new low of ₹76.87 per dollar. “There is a clamor for fiscal support via another round of a stimulus package,” says Rahul Gupta, head of research, currency at Emkay Global Financial Services. “This could provide some cushion to depreciating rupee,” Gupta adds.

However, in his opinion, until the lockdown is lifted and there is a pickup in earnings growth of companies, the outlook for rupee will remain wobbly. “We expect trade within 75.75-77.30 coming days,” he adds. “The 77 (level) will act as a crucial resistance in spot and can open door for 77.30 and 77.50.”

Gupta has company in Naveen Kulkarni, chief investment officer at Axis Securities, who opines that the systemic challenges continue to be quite significant as there is both demand and supply destruction in the economy which have significant balance sheet impact on the banking and financial services firms. “So, with time, more reforms, guidelines and measures can be expected from RBI as the extent of systemic challenges becomes more visible," says Kulkarni.

Beyond the equity and currency market, Avnish Jain, head, fixed income, at Canara Robeco Asset Management Company, points out that the debt market reacted positively to RBI announcements with 10-year yield dropping 7-10 bps. “Shorter term yields dropped more as reverse repo rate was reduced, “says Jain. Corporate bonds yields also fell, especially those of NBFCs and HFCs on account of the ₹50,000 crore TLTRO and National Housing Bank (NHB) special refinance scheme.

Like Gupta and Kulkarni, Jain also advocates that markets are still awaiting government stimulus plans and impact on fiscal deficit and gross borrowings. “While corporate markets will get relief from RBI announcements, government bonds will likely be driven by central and state government borrowings and the rally may be short lived.”

Navneet Munot, ED & CIO of SBI Mutual Fund, sums up RBI’s action as plugging of the loop-holes observed with the first round of ‘bazooka’ policy actions on March 27, and further addresses the sectors, entities, issues which are under immediate stress like NBFCs, commercial real-estate, even states. On markets, Munot points that there is stress in economic activity and hence growth suggests that rates will have a softening bias.

“While the fundamentals of macro-economic (growth-inflation dynamics) guides towards a lower rate, credit challenges remain,” says Munot. “Given the continued uncertainty around the evolution of the Covid-19 situation and resulting challenges in the equity market, and overall economy in general, we continue to remain bottom-up in our stock picking,” he adds.

Pointing to the piecemeal manner of infusing liquidity, Jimeet Modi, founder & CEO of SAMCO Securities, thinks the measures are more conservative than big bang. “The measures though significant, were not substantial enough as a mere ₹50,000 crore in the form of TLTRO is rather conservative,” says Modi.

He opines that RBI measures have boosted investor confidence, as the quarterly numbers to be published by corporates will no longer be a horror story. “Additionally, RBI’s openness of providing further relief if the situation worsens further is a big relief in these distressed times.”

While RBI has done its bit for now, the markets wait for the finance ministry to come up with its next set of fiscal stimulus measures. This time, the industries are looking for the savior to bail them out of the crisis.