Extraordinary times call for unprecedented measures. The Reserve Bank of India unleashed a wide array of measures, from a sharp 75 basis points repo rate cut to more long-term Repo operations and moratorium on term loans in a bid to stabilise the financial system and cushion the economy, battling the effects of a countrywide lockdown amid rising cases of novel coronavirus (COVID-19). The measures announced by the RBI, a day after the government rolled out a Rs 1.7 lakh crore stimulus package for the poor, will inject Rs 3.74 lakh crore liquidity into the system.
The bi-monthly monetary policy meeting of the RBI was scheduled on March 31, April 1 and April 3. However, it was advanced to March 24, 26 and 27 in wake of the coronavirus outbreak. Over the last couple of weeks, most major central banks around the world had announced various stimulus measures including slashing of interest rates to near zero.
There was a growing demand back home for the RBI to cut interest rates too. The measures announced on Friday go well beyond that and were across the board.
To begin with, the benchmark repo rate (the rate at which the central bank lends money to banks) was cut by 75 basis points, compared with market expectation of up to 50 bps cut. Now, the repo rate will come down to 4.4 per cent, from 5.15 per cent earlier.
Simultaneously, the reverse repo rate (the rate at which central bank borrows from commercial banks) was slashed by an asymmetrical 90 basis points. So far in March, banks had been parking on daily average Rs 3 lakh crore under the Reverse Repo. So, the RBI has reduced the reverse repo rate sharper than the Repo in a bid to make it unattractive for banks to passively deposit funds with the RBI and rather use the funds to lend to various sectors.
After the RBI mandated banks to link loans to an external benchmark for better transmission last year, many banks introduced new loan products that were linked to the repo rate. However, effective rate transmission has been much lower for the bulk of older loans, which are still linked to the marginal cost of funds-based lending rate (MCLR) or base rate and prime lending rate.
So how much of the latest repo rate cut is transmitted to borrowers by banks needs to be watched. To ensure that there is further transmission of interest rates, the central bank will conduct targeted long-term repo operations of up to three years totalling up to Rs 1 lakh crore. The first tranche will conducted on Friday itself.
This will be in addition to five LTROs worth Rs 1.25 lakh crore conducted between February 17 and March 18.
Furthermore, RBI also slashed the cash reserve ratio or CRR (the amount of money that banks have to keep with the RBI as reserves), by 100 bps, to 3 per cent, with effect from the reporting fortnight beginning March 28 for one year. This CRR cut will release Rs 1.37 lakh crore across the banking system.
Also, the requirement of minimum daily CRR balance maintenance has been reduced to 80 per cent from 90 per cent; the one-time dispensation will be available up to June 26, 2020.
“We are living through an extraordinary and unprecedented situation. Everything hinges on the depth of the COVID-19 outbreak, its spread and its duration. Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode,” RBI Governor Shaktikanta Das said through a video address on Friday.
Amid the lockdown announced to tackle the spread of coronavirus, manufacturing plants, barring essential commodities, have been suspended, business are closed or most office-goers working from home, banks are operating with limited staff and reduced hours and most bazaars, stores, cafes—barring food and groceries—remain shut. This is expected to have a big impact on the economy, which had already slowed sharply.
Similar lockdowns imposed in many other countries will have a global economic and financial impact.
“Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed. There is a rising probability that large parts of the global economy will slip into recession,” said Das.
In the second advance estimates of the National Statistics Office released in February, India’s implied real GDP growth for the January-March quarter was pegged at 4.7 per cent. However, in the wake of the coronavirus pandemic, that is now at risk.
Depending on the intensity, spread and duration of the coronavirus pandemic, most sectors of the economy, apart from continued resilience of agriculture and allied activities, are expected to be hit in 2020-21.
Retail inflation had spiked up sharply over the last few months due to a surge in prices of vegetables like onions. Aided by record foodgrain and horticulture production, food inflation is expected to fall now. The sharp fall in global crude oil prices will also help in lowering fuel and core inflation.
The central bank has refrained from providing any forecast on GDP growth or inflation for the coming financial year, in the wake of the uncertain times.
There were also certain relief measures announced by the central bank to ease the burden of the common man as well as companies.
All commercial banks, including regional rural banks, small finance banks, local area banks, cooperative banks, financial institutions and non-banking finance companies, including housing finance companies and micro-finance lenders, will be permitted to allow a moratorium of three months on payments of instalments of all term loans outstanding as on March 1, 2020.
Also, lenders will be permitted to allow a deferment of three months on payments of interest in case of working capital facilities sanctioned in the form of cash credit/overdraft. Lenders have also been allowed to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers.
It must be noted that the deferment of interest rates and three-month moratorium on payment of term loan instalments has not been made mandatory, but banks have been given an option to offer that relief if they chose to do so.
Also, it must be emphasised that the central bank is not waiving off the interest payments on working capital facilities. But, the accumulated interest for the period will have to be paid after deferment period.
Importantly, the moratorium on term loans, deferring of interest payments on working capital and easing of working capital financing will not qualify as a default. Thus there will not be any adverse impact on the credit history of the beneficiaries.