The Reserve Bank of India announced a series of steps that will release nearly as much as $3.7 lakh crore (nearly $50 billion) into the Indian economy for relief as it battles the effect of the novel coronavirus and the lockdown placed to contain the pandemic spread.
The monetary policy panel agreed to slash the repo rate by 75 basis points and 90 base points to the reverse repo rate. The reverse repo rate saw a sharper cut to prevent banks from depositing money with RBI. “In the last couple of days, banks have deposited some 3 lakh crore daily with the RBI,” said the RBI Governor, citing that the credit flow has stopped.
“Hard times will not last but hard people and hard institutions will,” he said.
Here are some of the highlights of RBI Governor Shaktikanta Das’s speech:
1. The new repo rate (the rate at which banks are lent by the RBI) would be 4.4 percent compared to 5.15 percent earlier. The decision was made following a plurality vote of 4:2 in the Committee on Monetary Policy.
2. All commercial banks including national, rural and other banks are allowed to permit a 3-month moratorium on payment of installments on all outstanding terms of loans as of March 1. 3-Month tax deferment on working capital assets. Accumulated interest for the duration is paid until the deferment period ends. The moratorium on working capital terms and internet deferment does not lead to a reduction in asset classification. Banks and financial institutions will do everything possible to ensure smoother credit flow to all those affected by the novel coronavirus
3. LTRO: Long-term repayment operations
These are tools that are used to take advantage of working capital loans. RBI will conduct a long-term repo of upt03-year tenor for 1 lakh crore. Bank investments would be listed as’ hold-t0-maturity’ rather than’ big exposures.’ Today (March 27) will be released the first tranche of about 25,000 crores.
4. All banks ‘ cash reserve ratio will be reduced by 100 basis points for 1 year from March 28. This will release around 1.37 lakh crore in the banking system uniformly. The recording of the minimum daily CRR balance will be reduced from the current 80 percent to 40 percent until June 26 to ease the enforcement burden on bank workers. From 2 percent, the marginal standing facility will be increased to 3 percent, opening space for banks to borrow another 1.37 lakh crore from the RBI under the LAF window at reduced interest.
5. The measures announced above will unlock the Indian economy with 3.7 lakh crore. After the last monetary policy review, the RBI has infused some 2.8 lakh crore (1.4 percent of India’s GDP) and after today’s announcements, overall liquidity injection will cross 3.2 percent of GDP.
6. Banks were permitted to trade in the offshore rupee derivative market (the non-deliverable forward market) as of 1 June 2020 to boost price discovery performance.
7. Retail inflation in January and February 2020 was 30 basis points above the RBI forecast mainly due to an increase in onion prices. Future though, aggregate demand may further decrease, and oil prices may decline to ease consumer price inflation. “The situation is rapidly evolving, the outlook is unpredictable as never before and the Monetary Policy Committee, therefore, refrained from forecastingCovid-19’s effects on GDP and inflation,” Das said.
8. India’s GDP was forecast to rise at 4.7 percent in the last quarter of 2019-20. It’s now in danger, the Governor said. “When everybody follows the rules some of the worries about growth can be minimized,” he said.
This comes as a relief for the Indian economy which has been battling corona and slowdown before corona. We hope that the time will change.