Thread by @mosesharding

What to expect from @RBI on 6th August across (a) policy rate action (b) liquidity action (c) Status of C-19 moratorium ending on 31st August and (d) restructuring of C-19 impacted loans?

Although these matters look to be straightforward, but complex for effective decision...1/N

Policy rate action: @RBI is expected to have comfort on benign inflation (despite elevated headline) and concerned on growth contraction - H1/FY21 by >10% and the need to catchup in H2 squeezing top-line GDP gap between FY20 & FY21, hence need to retain accommodative stance...2/N

Is there need to cut Repo rate? Repo rate at 4% is irrelevant today & till end of Q2/FY21 ahead of October policy review, hence no need. What about Reverse Repo rate? Reverse flow of ₹6 Trillion at 3.35% is bad for system when in accommodation mode - for banks & borrowers...3/N

Can R/R be cut to 3-3.10% to push Banks to lend, when reduction from 3.75% (widening LAF corridor spread from 25 to 65 bps) didn’t yield desired results? Don’t think so, when most benefit would go to AAA/AA borrowers and worse for Banks on NII & pushed to higher credit risk...4/N

Would expect status-quo on policy rates (retained at 3.35-4%) with guidance for operating policy rate stability at 3.25-3.5%, which is win-win till credit risk aversion gets diluted!

Management of liquidity is major worry for RBI. How to bring reverse flows to near zero?...5/N

RBI is also adding to (excess) liquidity woes by OMO purchases (to keep 10Y yield below 6%) and USD/INR bids (to prevent ₹ appreciation beyond 74.50); so, liquidity management gets complex, notwithstanding need of cash for deficit monetisation; between the devil & deep sea...6/N

On C-19 moratorium book (repayment obligation between 1/3-31/8/2020), RBI dispensation is available for payment before 31st March 2021 and banks treating principal + interest as Special Short Term Loan, which helps borrowers in recovery of cash losses from lockdown impact...7/N

But, when lockdown is not expected to be lifted completely by end August, will borrowers be in position to pay September-November obligations to avoid NPA status in December 2020? Doubt it! So, there’s need for extension to avoid Gross & Net NPA spike in Banks in Q3/FY21...8/N

All taken, whether moratorium is extended or not, Banks NPA woes set to turn from (pre-Covid) bad to (inclusion of C-19 moratorium) worse in H2/FY21, which brings the necessity of “loan restructuring” tool into radar, to keep banks in lending mode when most in risk aversion...9/N

So, make or break impact on the system is from effective measures on “loan restructuring of C-19 impacted loans”, Period! Nothing else is of immediate concerns! Unfortunately, this is outside of MPC and good that @FinMinIndia and @RBI are at it, and time is of essence...10/N

Restructuring of C-19 moratorium loans for borrowers that have bandwidth (security & plough back of previous repayment for status-quo position) is straight forward, but what about others that banks would need to take compromising positions? What’s the comfort to lenders?...11/N

It’s obvious that banks would be asked to provide for compromise treatment to keep this portfolio as standard. Who will pay for it? Tax payers or investors? If dipped into P&L account & dividend payout, it’s not fair to investors, while taxpayers will take in their strides...12/N

So, need budgetary sacrifice to put restructuring into work - just a blanket fit-all plan will not be constructive & effective! It’s also good that @RBI has balance sheet bandwidth to support @FinMinIndia in deficit monetisation and capacity to stop-gap backstop guarantee...13/N

To conclude, will expect the following on 6th August: (a) status-quo in policy rates (b) TLTRO kind for liquidity diversion from R/R counter to borrowers (c) moratorium extension till November (d) general restructuring scheme and special for those needing banks sacrifice...14/14