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RBI provides much-needed shot in the arm to corporate debt market

RBI on Friday announced measures to inject Rs 3.74 lakh crore into the banking system.

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Last Updated: Mar 27, 2020, 08.52 PM IST
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RBI said it will conduct auctions of targeted term repos of up to three-year tenor.
NEW DELHI/MUMBAI: The Reserve Bank of India on Friday provided the much-needed shot in the arm to the non-SLR market in terms of liquidity support. Market participants gave a thumbs up to the central bank’s targeted LTROs (TLTROs), and said this will help in reducing the yield on corporate bonds, which have been reeling under pressure amid low volumes.

The central bank said it will conduct auctions of targeted term repos of up to three-year tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.

Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, RBI said.

R K Gurumurthy, Head of Treasury, Lakshmi Vilas Bank said: “RBI has this time announced a TLTRO, where the funds raised under the scheme will be allowed to have an end-use of buying corporate bonds and commercial papers. And these can be held under the Held-To-Maturity (HTM) category. This will provide the much needed shot-in-the-arm for the non-SLR market in terms of liquidity support.”

CARE Ratings in a note said the fresh liquidity injection into the banking system, when there exists ample liquidity at the overall level would help address the liquidity asymmetry to an extent.

Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio. RBI said exposures under this facility will also not be reckoned under the large exposure framework.

The first TLTRO auction of Rs 25,000 crore was held today.

CARE also pointed out the condition that the liquidity created on account of TLTRO has to be deployed in corporate debt securities, is aimed at reducing the yields of these instruments, which in recent days have been pressured on account of large selloff along with low trading activity.

This should help sectors such as NBFCs, which traditionally borrow from the market through bonds and commercial papers, the ratings agency said in a note.

Overall, the Reserve Bank of India earlier in the day announced measures to inject Rs 3.74 lakh crore into the banking system through a slew of instruments, including the reduction in cash reserve ratio and interest rate cut.

The other liquidity support measures included targeted long-term repo operation (TLTRO) and increasing the limit under the marginal standing facility (MSF) to 3 per cent from 2 per cent.

These three measures relating to TLTRO, CRR and MSF will inject total liquidity of Rs 3.74 lakh crore into the system.

Commenting on the measures announced by RBI, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company, said: “The policy measures announced are big moves by the central bank to address concerns on liquidity and facilitating flow of credit in the economy. This will ensure that adequate liquidity is available in the system to tide over the prevailing crisis period.”

While quoting a song from the movie ‘ Hera Pheri’ – ‘ Dene Wala Jab bhi deta, Deta Chappar Phad Ke’, Iyer said the central bank has adopted a 4-pronged approach to manage the financial system. A) Increased liquidity - Rs 3.74 lakh crore additional liquidity, B) Lower policy rate and likely leading to better transmission of the cut policy rate. 3) Provision of loan moratorium and asset classification forbearance and lastly managing forex situation.

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