In view of the disruptions caused to global trade by the Coronavirus pandemic, the RBI has granted relaxation in the timeline for realisation of export proceeds by 6 months to 15 months from current 9 months for exports made up to 31st July. This operational flexibility will allow exporters to extend longer credit periods to overseas buyers and help them negotiate contracts better. This DOES NOT entails extension of existing forwards booked which will have to be rolled over at maturity (after 3 days Grace) if collection is not received. Cash loss if any on cancellation and rebooking will not be averted.
Also in order to help the states and Union territories tide over the liquidity crunch, the RBI has increased the WMA (Ways and Means Advances) limit by 30%. The WMA is a window through which the RBI provides short term credit to centre and states for upto 90 days to help them tide over temporary mismatches between receipts and payments. This may help cool off the SDL spreads. The states have borrowed at spreads of 120-140bps over corresponding tenor Gsec yields in last two SDL auctions. The RBI had yesterday increased the WMA limit for central government to Rs 120000cr from 75000cr
Also, the RBI has decided not to activate the counter cyclical buffer which will give banks relief in terms of capital requirements. The banks will need to hold less capital as a percentage of their risk weighted assets.
The US announced a repo facility with other central banks to ease the USD funding stress. Though the treasury yields have come off after massive bond buying by the US Fed, the LIBOR is still elevated.
We saw Indian banks capitalize on this dislocation. There is abundant INR liquidity after the slew of measures announced by the RBI. Banks are doing a Buy-Sell USDINR swap and lending the USD to earn a clear spread of 1%. Forwards crashed yesterday with Cash-tom even flipping into a discount. The April end forward points had reduced to merely 0.60p per day.
In a move that is likely to facilitate monetary policy transmission, the rate on small savings was revised lower by about 80-100bps across schemes. The small savings compete with bank deposits and since they were elevated, banks were not able to reduce deposit rates and therefore also the lending rates. 1y forwards have come off by around 50p. 12 month offshore forward points too have crashed.
The government borrowing calendar for H1 came out last month. The government will borrow Rs 4.88 lakh cr in H1 FY2021. The government said it is not looking to place bonds directly with LIC or RBI and will borrow from the market. The government is also looking to raise funds through the debt ETF issuance route in H2.
We put together our take on the major domestic and global factors driving risk sentiment over the medium term with special emphasis on political developments, monetary policy outlook and fiscal policy implications.
We may see some volatility on account of domestic election results in the sh...
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