Mr Karan Kapadia — CEO & Co-Founder at Phundo Fintech India Limited

Dear Investors,

At the outset, the team at Phundo wishes you, your family and community the very best of health as we navigate these difficult times. COVID-19 or Corona Virus unleashed on the world community has wreaked havoc across countries in manner that has never been witnessed before.

T he chaos that prevailed across the world sent investors to look for safety. Money was pulled out through all structures — ETFs, FIIs, DIIs, Sovereign etc resulting in stock markets crashing. As Ramdeo Agrawal CIO — Motilal Oswal said on a conference call " Whatever I touched collapsed. There is no logic, no reason for quality companies to fall by 30–35–40% in the shortest possible time." Regulators world over brought in guidelines on short selling, stock exchanges stopped trading for a few hours, analysts were confused as the dynamics shifted by the minute.

Bonds were considered safe to park money pulled from equities and the rush of funds into Treasury bills depressed yields. A JP Morgan analyst on a call said that the Bank was willing to deploy in US sovereign even if yields dropped to zero ! This unprecedented panic pushed financial markets into a nose dive. It wasn’t a while for governments to understand that the crisis they were dealing with was not a financial crisis but a biological catastrophe.

World leaders have stepped in swiftly to lockdown countries and economic activities, in a matter of few hours, have come to a grinding halt. India has taken the most stringent actions one cannot imagine with a closure of the country in a manner that no one has seen before! Governments around the world have introduced measures to ensure that a systemic collapse of the financial system and a repeat of the 2008 crisis is avoided at all costs.

The Indian Government’s plan of action has been calibrated and commendable — first acclimatise Indians to a voluntary curfew called “Janta Curfew”. Next came a 21 day forced lockdown with states sealing their borders. With the exception of essential services — health, food suppliers, fuel and so on, no other businesses were permitted to ensure social distancing to stop the spread of the virus. This was followed by two pressers by the Finance Minister in quick succession — one aimed at relaxation of compliance filings and the second to infuse Rs 1.75 trillion for the farmers, daily wage earners, contract workers and those that are the most vulnerable to be adversely impacted by the economic downturn due to this event.

In this article, we shall try to decode the measure that the Reserve of Bank has taken in its announcement of 27th March 2020 with the intention of fighting this pandemic, as the third bazooka fired by the government. In my career of 23 years in financial services, I have never come across a more aggressive RBI governor who emphatically stated “Yet, it is worthwhile to remember that tough times never last ; only tough people and tough institutions do” & these are strong words.

The RBI has taken four key steps:- (a) Increase liquidity in the system (b) make sure the lower policy rate is transmitted (c) Extend a three month payment holiday on all term loans and (d) step in to reduce volatility and provide stability.

Lets look at each step in detail and how this impacts you and your investments decisions :-

Steps (a) and (b) are interlinked hence explained together. The RBI Governor fired the first bullet by announcing a steep cut in in the repo rate by 75 basis points (100 basis points makes a percent) to 4.4%. Repo rate is the rate at which the banks borrow from the RBI. Banks give eligible securities they hold for cash that RBI gives as an overnight loan. Banks pay the repo rate as interest for this borrowing.

When the repo is high, banks find it more costly to borrow from RBI and passes on this cost to borrowers – businesses and individuals – making interest rates on loans higher. By lowering the repo rate, the interest rates on loans is reduced hence allowing entrepreneurs, companies, individuals to borrow money from their bank at lower interest rates. But previous rate cuts have not been ‘transmitted’ by the banks who have not reduced lending rates and have preferred to keep money with the RBI at the ‘reverse repo rate’. This is the rate at which banks lend to the RBI. The RBI has now reduced the reverse repo rate by 90 basis points to 4%, making the cut sharper than the one on the repo rate to encourage banks to borrow from the RBI rather than lend to it.

Banks have preferred to deposit money with the RBI rather than lend it out with an average estimated daily limit kept with the RBI at Rs 3 trillion. The reduction of reverse repo at 4% makes it unattractive for banks to park funds with RBI.

Who benefits from this change :- Borrowers, industry at large

If there is lockdown, the wheels of the economy come to a grinding halt creating serious imbalances in the system. In such cases, there is rush for safety as people start withdrawing from equities, bonds and mutual funds. These redemptions turn into a fire sale! And once there are no buyers at the other end, there begins to be a market freeze. We are near freezing point and to stem this, the RBI has stepped in with Rs 3.75 trillion made available to keep the engines well oiled with cash.

This has been done with four important announcements :-

  • RBI will lend money to the banks (Rs 1 trillion) that can be used to invest in bonds and other instruments. Important to note that these investments will not be considered under the mark-to-market (MTM) system but held-to-maturity (HTM) classification. To clarify, the MTM method values the bonds at the current market prices and in times of distress as we are seeing today, these values could be wrong or not available. Under HTM, trades happen at the price that is not confused meaning the value of the bond is given based on rate of interest of the bond, the holding period and rating. This will hugely benefit the bond holders and stabilize the bond markets in India.
  • By reducing the cash reserve ratio by 1% to 3%, RBI has allowed banks to lend more thereby improving their margins. The cash reserve ratio — CRR — is the percentage of demand and time deposits banks have to keep with the RBI. So if you deposit Rs 1 lakh, Rs 4,000 cannot be used by the banks to lend since it needs to keep this with the RBI as a ‘reserve’. This is in addition to the statutory liquidity ration — SLR — set at 18.25% of deposits (no change in SLR). The percentage point drop in CRR has freed up Rs 1.37 trillion for banks to lend.
  • The Rs 1.37 trillion will be made available under the emergency lending window managed by the RBI called the marginal standing facility (MSF). Basically, RBI is willing to lend more to the banks…..that’s Rs 1.37 trillion !!
  • To ensure that the banks lend more, the cost of lending to RBI has gone down more than the cost of borrowing. The drop of 15bps in lending to the RBI creates a disincentive for banks to lend to the RBI. They would rather increase their lending externally and if required borrow more from RBI.

Who benefits from these changes : Banks, capital markets including mutual funds, in-specific bond funds, industry.

So, earlier on we explained (a) & (b) and who will benefit from these announcements. In continuation, lets explain (c) I call this a “payment holiday”. Experts have been talking about it for sometime and RBI has this executed beautifully. Under the payment holiday program, borrowers of all term loans including those with housing loans and other loans will be allowed a moratorium of 3 months on their monthly instalments (EMI). This means for the next 3 months banks will not collect the EMIs and incase you are unable to pay, they cannot downgrade your credit history or take legal action for non-payment of your loan during this period. However, this discretion to extend this facility has been left upto the banks.

The intention is quite clear. Banks need not mark these loans due to non-payment as non performing assets — NPAs. In these tough times, defaults and delinquencies on loans could rise severely impacting the banks’ balance sheets as well as the inability for borrowers to raise future loans.

Who will benefit from this change : Retail borrowers, Banks, Industry.

Finally, on point (d), RBI has stepped in to reduce the volatility of the price of the rupee in international markets by allowing banks to deal in off-shore non-deliverable rupee derivative markets. We have seen the havoc a falling rupee created in June 2013 forcing RBI to increase interest rates overnight by 2.25%. This time they are mindful of not triggering a systemic event in the currency markets.

As an expert said post the RBI’s presser on the morning of 27th March 2020, “RBI has come out with all guns firing.” Decisive action, quick reaction, and even quicker execution! So, should you invest ? Based on your risk appetite, we recommend increasing your investments in both equity and debt mutual funds. As Prashant Jain — CIO HDFC AMC puts it “For the first time I am using the term deep, deep value for Indian equities”. S Narain — CIO ICICI Prudential stated “Now is the time after a long time for both debt and equity”

Let us know if you have any queries. We are here to help!

Disclaimer: Mutual Funds are subject to market risks. Please read the offer document before you start investing.


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