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

  1. Interest rates are likely to remain low. Good for borrowers and bondholders.
  2. NPA cycle will ease
  3. Banking and Corporate profitability shall increase. This is good for the economy and equity markets
  4. Shall help in boosting consumption
  5. In the medium term, the credit cycle may eventually take off.

Negative impact

  1. 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.
  2. 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!

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By Sameer Rastogi

18 years of experience, PG in Finance and has delivered Wealth Management lectures at IIM Lucknow, IBS Gurgaon and IIPM Delhi. Contributed to various newspapers. Strength – Application of Economic fundamentals to Investment

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