Covid-19 Lockdown: RBI puts off EMIs, Slashes Interest Rates
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The Reserve Bank of India (RBI) has gone all out to fight the economic fallout of coronavirus or covid-19 virus. As Shaktikanta Das, the central bank governor, said during the press conference on 27 March “The time has come for the RBI to unleash an array of instruments from its arsenal to mitigate the impact of covid-19, revise growth and preserve financial stability.”
The expected economic impact of 21-day countrywide lockdown, ending on April 14, imposed to prevent the pandemic from spreading, prompted the central bank to advance its monetary policy originally slotted for first week of April.
As per market expectations, the Monetary Policy Committee (MPC), led by Das, cut its benchmark repo rate by 70 basis points (bps). The repo rate now stands at 4.40 per cent, lowest since 2004. Further, the reverse repo rate (RRR) has been cut by 90 bps, reducing it to 4 per cent. Reverse repo rate is the rate at which RBI borrows from commercial banks. A lower RRR makes it unattractive for banks to deposit funds with the central bank.
In this fiscal package, the MPC has taken a wider look at the economy as it is of the view that macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. “The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic,” said Das.
With this approach, the RBI has gone beyond just rate cuts to announce several regulatory and liquidity measures.
First, the central bank slashed the cash reserve ratio (CRR) by 100 bps to 3 per cent, lowest since 1962. CRR is the minimum percentage amount of the total customer deposit that banks have to either keep with the central bank or reserve in the form of cash. As CRR, also called liquidity ratio, controls money supply in the economy, such a sharp reduction in it will inject liquidity in the system. “Reduction in the CRR would release primary liquidity of about INR 1.37 lakh crore uniformly across the banking system,” said the RBI statement. This will be available to banks for one year.
Second, the extent to which banks can dip into the statutory liquidity ratio (SLR)—minimum percentage of deposits banks have to reserve in the form of government securities, gold or cash—to borrow from the RBI’s marginal standing facility (MSF) is increased from 2 percentage points to 3 percentage points.
Third, INR 1 lakh crore has been dedicated to targeted long term repo operations (TLTROs) of three year tenure. Banks should deploy the availed funds in corporate bonds, commercial paper, and non-convertible debentures.
These three measures relating to TLTRO, CRR and MSF will inject a total liquidity of INR 3.74 lakh crore to the system, as per the RBI.
Experts are hailing these measures as bold steps that will resuscitate confidence and growth in the economy. “The reduction in repo rate brings financial relief to the common man, while a whopping 80 per cent reduction in CRR will infuse much needed liquidity into the system,” says Sathya Kalyanasundaram, Country Head and Managing Director, Experian India.
Apart from boosting liquidity in the banking system, the RBI also attempted to ease loan burden on borrowers. All banks and non-banking lenders have been permitted to allow a three month moratorium on term and working capital loans to borrowers, effective 1 March.
The MPC refrained from giving a growth or inflation outlook because of the high uncertainty in the economy. However, economists and rating agencies have started expressing their reservations about the country’s GDP growth for this year in wake of the countrywide lockdown, which may be extended if the pandemic is not controlled. Moody’s Investors Service has nearly halved the expected GDP growth rate of India for this year to 2.5 per cent from the earlier 5.3 per cent.
Sunil Kumar Sinha, Principal Economist, India Ratings, says the package can contain the adverse impact of lockdown, and as a result of coronavirus, on the country’s economic growth only to an extent. “Economic downside is a given. These fiscal and monetary measures, which are definitely steps in the right direction, can help mitigate the downside and ensure that the system doesn’t collapse,” he says.