India: coping with COVID-19

India's “Whatever is necessary” policy approach echoes steps taken by other markets

The Reserve Bank of India (RBI) has announced a series of steps to manage financial markets and support the economy, including relief for borrowers, amid the COVID-19 outbreak.

To stimulate growth, the RBI governor reiterated the “Whatever is necessary” policy approach we are seeing in many parts of the world, acknowledging high uncertainty and significant downside risks to growth amidst a benign inflation outlook.

Reducing rates to stimulate growth

India’s Monetary Policy Committee (MPC) met a week ahead of schedule and reduced the repo rate (the rate at which the central bank lends money to commercial banks) by 75bps to 4.4 per cent. This will help banks address any urgent liquidity shortfalls.

Ensuring liquidity in the banking system

India announced a number of unprecedented measures which are expected to add INR 3.7tn of liquidity to the financial system to provide support for banks, corporate debt and money markets. This approach looks to ensure the flow of capital to the financial markets and an economy struggling with the impact of COVID-19:

  • Launching its first targeted long-term repo operations (TLTROs) of INR 1tn, with a maturity of 3Y at a floating rate linked to the repo rate. The liquidity provided to banks via this window has to be deployed in investment-grade corporate bonds, commercial paper or non-convertible debentures – in equal proportions in both the primary market and the secondary market (i.e. via mutual funds and non-bank financial companies)

  • The cash reserve ratio (CRR) reduction by 100bps to 3 per cent is expected to add INR 1.37tn to banking-system liquidity for one year. The requirement for the minimum daily CRR balance was also reduced to 80 per cent from 90 per cent to ease pressure on banks

  • Banks can now borrow against 3 per cent of their statutory liquidity ratio (mandatory holding of government bonds), up from the previous 2 per cent. This measure is expected to provide them with additional liquidity support of INR 1.37tn

  • To provide relief to borrowers, the RBI announced a three-month moratorium on all term loans; interest payment on all working-capital loans has been deferred for the same period to provide relief to companies

Looking ahead

We expect another 25bps rate cut by the June policy meeting, taking the repo rate to 4.15 per cent. There is a risk of more cuts if the economic situation deteriorates further.

The RBI’s ample FX reserves are likely to keep FX volatility in check, so we expect the USD-INR to trade within a 74-76 range.