On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) of the Reserve Bank of India at its meeting on May 22, 2020 announced a set of monetary policy measures in order to help the Indian economy overcome the fall out of COVID 19 pandemic and the lockdown.
The MPC has announced a further cut in the repo rate which has been brought down by 40 BPS (basis points). So, this brings down the repo rate from 4.4 per cent to 4 per cent. This reduction in repo rate is expected to bring down the cost of borrowings from banks; hence, banks would be expected to give out cheaper loans to their customers which, in turn,is expected to revive growth in the economy. This is the second reduction in repo rate that the RBI has announced in the last two months hoping to revive growth which has come to a standstill as a result of the lockdown.
The COVID 19 pandemic has primarily affected the top industrialised states of India which account for nearly 60 per cent of India’s industrial output. Most of the districts in these industrialised states have fallen under the red and orange zones and, as a result, economic activity and industrial activity in these districts have come to an almost complete standstill.
The affected states include Tamil Nadu, Maharashtra, Gujarat, Andhra Pradesh, Uttar Pradesh as well as Karnataka and the NCR region. In fact, the impact of the lockdown is so severe that the RBI has estimated India’s GDP growth to fall into the negative territory this financial year and the nation could be very well headed towards a long period of recession. Considering the circumstances, the rate cut has become absolutely essential in order to introduce more liquidity into the market and provide for cheaper loans so that industrial activity and economic growth could be revived.
This ‘Pro Growth’ policy that the RBI has adopted is in line with its accommodative stance that has been formed over the last one year. In fact, even before the pandemic hit India the Indian economy was going through a tough phase and there was a lack of demand and slow economic growth as a result of mainly the impact of demonetisation and the poor implementation of GST.
Over the last 15 months, the RBI has reduced the repo rate by 250 BPS (basis points), bringing it down from 6.5 per cent to just 4 per cent. But adopting a pro-growth policy for a prolonged period increases the risk of inflation. And since the pandemic is here to stay it is bound to affect growth for the coming months, even for the coming years.
As repo rate cuts introduce more liquidity into the market and thereby increases demand substantially, there is likely to be price rise and inflation in the long run. But considering the unprecedented circumstances that we are dealing with, the challenge of tacking inflation is a problem for another day and hence the MPC has not announced any inflation targets for this financial year. Basically, the RBI is holding back on its mandate of tackling inflation for the time being.
Apart from cutting the repo rate, the RBI has announced an extension to the loan moratorium that was announced earlier in March; accordingly, borrowers can defer loan repayment by another three months. When the first lockdown was imposed in March, the RBI announced a series of monetary measures in order to support the economy. This included the moratorium of loan repayments for three months from March 2020 to May 2020. This moratorium on loan repayments has been extended by another three months, i.e., until August 2020. All conditions related to the extension remain unchanged, that is, the loan will not be classified by the lender as a ‘non-performing asset’ and there will not be any impact on the creditworthiness of any borrowing individual or firm. RBI has allowed borrowers and banks to convert the interest charges during the moratorium period (from March 1, 2020 to August 31, 2020) into a term loan which can be repaid by March 2021. RBI did not permit a onetime restructuring of existing loans to the seriously affected sectors such as real estate, hotels, etc. as demanded by banks.
The group exposure limit of banks has been increased from 25 per cent to 30 per cent of the capital base for a temporary period till June 30, 2021. Group exposure limit determines the maximum amount a bank can lend to one business house. Under the existing guidelines on the Large Exposures Framework, the exposure of a bank to a group of connected counterparts should not be higher than 25 per cent of its capital base.
A Rs. 15,000 crore line of credit for a period of 90 days would be extended to the Exim Bank to boost the foreign trade.
Some Key Points
- Repo rate under the liquidity adjustment facility (LAF) reduced by 40 bps to 4 per cent from 4.40 per cent with immediate effect
- Marginal Standing Facility (MSF) rate reduced from 4.65 per cent to 4.25 per cent*
- Reverse repo rate reduced from 3.75 per cent to 3.35 per cent
- States allowed to borrow more from the Consolidated Sinking Fund (CSF) **
CSF was set up in 1999-2000 by the RBI to meet redemption of market loans of the states, and is to be maintained outside the consolidated fund of the states and the public account. It should not be used for any other purpose, except for redemption of loans.
- The RBI had announced a special refinance facility of ₹15,000 crore to SIDBI at RBI’s policy repo rate for a period of 90 days. This facility has now been extended by another 90 days.
- The maximum credit which banks can extend to a particular corporate group has been increased from 25 to 30 of the bank’s eligible capital base.
- * MSF is the rate at which the scheduled banks can borrow funds overnight from RBI against government securities.
* MSF is the rate at which the scheduled banks can borrow funds overnight from RBI against government securities.
** CSF was set up in 1999-2000 by the RBI to meet redemption of market loans of the states, and is to be maintained outside the consolidated fund of the states and the public account. It should not be used for any other purpose, except for redemption of loans.