Rupee can depreciate another 4% despite RBI's liquidity support measures

The Reserve Bank of India (RBI) unleashed a slew of measures to help the economy tide over the current crisis. It has launched targeted long-term repo operations (TLTRO) 2.0 of Rs 50,000 crore. Banks would be required to deploy at least 50 per cent of funds availed under this facility in bonds of smaller non-bank finance companies (NBFCs) and micro-finance institutions (MFIs).
This move is intended to reduce the funds being channelised only to the top rung NBFCs and ensure more equitable distribution of liquidity. The move has had an immediate impact. Commercial Papers (CPs) and short maturity (two - three years) corporate bond yields are lower by 30-40 bais ppoints (bps) compared to Thursday.
Providing further relief to banks, the RBI has reduced the liquidity coverage ratio (LCR) that banks are required to comply with to 80 per cent from 100 per cent. With this, the banks can now divert those funds from high quality liquid assets too. Besides, it has increased the WMA limit for states to 60 per cent. This will reduce the supply of SDLs in the near term and help cool off yields. 10yr SDL yields are down almost 20 bps.
The RBI has, also, relaxed non-performing asset (NPA) classification norms for NBFCs. It has restricted banks from disbursing further dividends for FY20. It has announced funding lines for NABARD, SIDBI and NHB to the extent of Rs 25,000 crore, Rs 15,000 crore and Rs 10,000 crore, respectively at repo rates so that these institutions can also lend at more competitive rates, thereby ensuring transmission.

Another cut in reverse repo by 25 bps to 3.75 per cent is intended to disincentivise banks from parking funds with the RBI and to incentivise them to lend to the real economy instead. Combination of measures to boost liquidity, improve monetary transmission and relax repayment schedules is the need of the hour in which RBI has been proactive and repeatedly insisting that they would do whatever it takes. Of course, this provides much needed liquidity and positive message especially for NBFCs, and a much-elaborate stimulus package is awaited.