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India's steep rate cut may help banking system, but impact unlikely immediate

The Indian central bank's unprecedented easing measures will be a shot in the arm to the economy, although the impact might not be felt immediately, analysts said.

The Reserve Bank of India March 27 announced its steepest rate cut in a decade, a day after the government announced a 1.7 trillion rupee relief package that includes distribution of cash and food to nearly 800 million poor and needy Indians affected by the national lockdown aimed at slowing the spread of COVID-19.

"What they have announced is unprecedented and it will have a massive impact," Sandeep Upadhyay, the managing director of Centrum Infrastructure Advisory, told S&P Global Market Intelligence in a phone interview.

The central bank reduced its overnight lending rate by 75 basis points to 4.40% from 5.15%. The overnight borrowing rate was slashed by a steeper 90 basis points to 4.0%, in addition to measures such as a 100 basis points reduction in the cash reserve ratio to 3.00% for one year, and lower minimum daily cash reserve balance effective till June 26, 2020.

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The central bank is making sure there is enough liquidity in the banking system, said Sameer Narang, the chief economist and head of strategic planning at Bank of Baroda. The repo and reverse repo rates normally move in tandem. But the deeper cut to the reverse repo rate "is a clear signal for banks to borrow from the central bank’s window and lend onward to the real economy," he said.

Even after these steps, the central bank will still have ammunition left if the situation worsens, Narang said. One more measure could be a standing facility for banks for them to lend to other lenders such as nonbank financial institutions and housing finance companies, he added.

The Reserve Bank of India also allowed financial institutions to impose a moratorium of three months on all term loans outstanding as of March 1. Accordingly, the repayment schedule and the tenor for such loans may be shifted by three months.

It is a "very prudent move" as all categories of borrowers, including retail loans, home loans and project loans, will benefit, Upadhyay said. The banks' nonperforming loans would have risen more without the measures, he said.

The central bank's "bold" moves address the supply side, but the effectiveness would have to be seen from the demand side. Banks were already flushed with funds and it is "good that we will have more visibility around it. That is where the industry has to respond," Upadhyay said.

The measures may take time to show impact on the real economy. "Demand is still six to nine months away. While it is bold in intent, the effect will be only marginal in the next three months," he said, adding, the benefits will begin to show perhaps from the July-to-September quarter or after the lockdown is lifted.

The Indian government March 24 ordered the nation's 1.3 billion people to stay indoors, allowing only certain essential services to operate. It also pledged $2 billion to shore up the nation's healthcare system.

As of March 26, US$1 was equivalent to 74.76 Indian rupees.