According to a report by the RBI, provision of liquidity through unrestricted (long-term repo operations) as well as targeted instruments (targeted long-term repo operations), together with policy easing, has enabled even lower rated companies to raise funds.
Last week, speaking at SBI’s economic conclave, RBI governor Shaktikanta Das had said that the central bank’s policy measures appeared to be working. He said that one of the objectives of the RBI’s measures was to ensure that the financial markets are stable and do not freeze.
According to the RBI report, its measures have resulted in markets remaining resilient, liquid and stable, establishing conditions for a finance-led recovery of the economy ahead of the revival of demand. The RBI’s measures to open the floodgates also resulted in yields in government bonds dropping to their lowest level in more than a decade. This was despite the increase in government borrowings and the significant loss of revenue due to the lockdown. The RBI also took measures to ensure that smaller players were not denied liquidity by targeted repo operations, which refinanced banks who invested in bonds of small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs).
The return of risk appetite was seen in the shrinking of the difference in rates (spread) between private and government debt. The decline in spread for AAA-rated NBFCs was the maximum at 170 basis points (100bps = 1 percentage point), followed by PSUs, FIs and banks (147bps) and corporates (146bps).
For AA-rated entities, the fall in spreads was 156bps for NBFCs, 143bps for PSUs, FIs and banks, and 138 bps for corporates. Spreads on the instruments issued by the PSUs, FIs and banks category have reverted to pre-Covid levels.
While the pain was averted for most segments of the market, NBFCs with short-term liabilities are still vulnerable. According to the report, outstanding commercial papers of private NBFCs in particular fell by 71%, from Rs 2.22 lakh crore as on July 31, 2018 to Rs 64,253 crore as on April 30, 2020. “Thus, while corporates and financial institutions continue to benefit from lower interest rates on short-term instruments, the NBFCs and HFCs (housing finance companies) have had to reduce their reliance on short-term financing,” the report said.