While the disappointment of Budget 2020 is not yet faded, RBI has surprised us all with a magic trick. It has done what the budget failed to do. RBI will introduce INR 100,000 Crores worth of liquidity in the system, over the next 2 months. This much liquidity shall be made available to banks for a period of 1 to 3 years at a lower cost of 5.15% p.a. (similar to Repo Rate). Also, as indicated by RBI, more such tranches will come eventually.
This shall have the following impact on the broader scale:
Positive Impact
- Interest rates are likely to remain low. Good for borrowers and bondholders.
- NPA cycle will ease
- Banking and Corporate profitability shall increase. This is good for the economy and equity markets
- Shall help in boosting consumption
- In the medium term, the credit cycle may eventually take off.
Negative impact
- No incentive for Banks to offer higher interest to deposit holders. Bank FD holders may come under pressure, as bank FD interest rates may remain low or reduce further.
- If the liquidity goes unchecked, it may create asset bubbles. Instead, the government should channelize the liquidity into employment generating sectors, via fiscal policies.
There is no other negative impact that I can think of. Overall, this move by RBI can do what the budget was expected to do! Achhe Din ….! May be …yes!