RBI Finally Pulls Out Its Weapons to Combat the Coronavirus Pandemic

Mar 28, 2020

Listen to RBI Finally Pulls Out Its Weapons to Combat the Coronavirus Pandemic

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Ever since the coronavirus pandemic has rattled the world economies and global financial markets, central banks across countries have been taking steps to support growth through rate cuts and liquidity infusion.

It started with the US Fed cutting rates by 50 bps in early March, twice the size of its typical rate cut, in an emergency response to boost economic growth amid the virus outbreak. Later, it reduced rate further to a target range of 0% to 0.25% in mid-March.

Bank of England, Bank of Canada, New Zealand Central Bank, among others too cut rates on slowdown concerns due to the pandemic.

On the home front, such measures from RBI was much awaited ... It was not a question of 'if' but 'when' and 'by how much'.

A day after Finance Minister Nirmala Sitharaman announced a Rs 1.7 trillion relief package for the poor to fight the impact of cornonavirus, RBI in a press meet on March 27, 2020, announced that the monetary policy committee (MPC) has decided to reduce policy rates by 75 bps to 4.40% from 5.15%.

It stated, they will maintain their accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy, while ensuring that inflation remains within the target.

"Make no mistake, it is a fight never seen before", RBI Governor Shaktikanta Das warned while outlining the risks to Indian economy.

The second advance estimates of the National Statistics Office released in February 2020 estimated real GDP growth of 4.7 per cent for Q4 FY20 and 5 per cent for the year as a whole. According to RBI, it is now at risk from the pandemic's impact on the economy.

RBI believes that while the outlook for agriculture and allied activity appears to be positive, consumption has been hit hard. Furthermore, several services such as trade, tourism, airlines, the hospitality sector, and construction have been adversely impacted by the pandemic.

But the current inflation situation appears to be a silver lining, providing room for rate cut. India's retail inflation fell a full percentage points to 6.6% in February from its peak of January.

RBI expects the shock to demand as a result of COVID-19 will weaken food inflation going forward. In addition, the plunge in international crude prices in March may bring a measure of relief to an extent.

The MPC is of the view that macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. It is of the opinion that the need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic.

In this context, the MPC unanimously voted for a sizable reduction in the policy repo rate.

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The Reserve Bank has taken several measures to inject substantial liquidity in the system in the past. Nonetheless, the current situation demands strong and purposeful action in order to minimise the adverse macroeconomic impact of the pandemic.

In this regard, the Reserve Bank has decided to undertake several measures to further improve liquidity, monetary transmission, and credit flows to the economy and provide relief on debt servicing. They constitute the following:

  • Liquidity Management

    Redemption pressures on corporate bonds, commercial papers, and debentures have surged due to the rapid spread of the pandemic, causing the yields to rise. To tackle these, RBI will conduct Targeted Long Term Repo Operations (TLTRO) of up to three years tenor for a total amount of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate.

    Banks that avail of the liquidity, under this, will have to be deployed in investment grade corporate bonds, commercial papers, and debentures and will be classified as held-to-maturity.

    To inject liquidity into the banking system, RBI has decided to reduce the cash reserve ratio (CRR) of all banks by 100 basis points to 3.0 per cent of net demand and time liabilities with effect from the reporting fortnight beginning March 28, 2020. This dispensation will be available for a period of one year ending on March 26, 2021.

    Furthermore, taking cognisance of hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements, it has decided to reduce the requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per cent effective from the first day of the reporting fortnight beginning March 28, 2020. This one-time dispensation will be available up to June 26, 2020.

    Marginal standing facility (MSF), under which banks can borrow overnight at their discretion by dipping up to 2 per cent into the Statutory Liquidity Ratio (SLR), has been increased to 3 per cent.

    These three measures relating to TLTRO, CRR, and MSF will inject a total liquidity of Rs 3.74 lakh crore to the system.

  • Regulation and supervision

    RBI is aware that disruptions caused by COVID-19 are likely to put a burden on debt servicing. To mitigate this burden and to ensure continuity of viable businesses, RBI has taken steps to provide relief to borrowers.

    Financial institutions like banks, NBFCs, etc. will allow a moratorium of three months on payment of instalments in respect to all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as well as the tenor for such loans, will be shifted across the board by three months.

    Payment of interest on loan in the form of cash credit/overdraft availed for working capital requirements will be allowed to be deferred for a period of three months. Lending institutions may also recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers.

    Such arrangements will not result in asset classification downgrade; while rescheduling of payments will not be qualified as default.

    Some other measures include:

    • Implementation of Net Stable Funding Ratio which was to be implemented from April 1, 2020 has been deferred to October 1, 2020

    • Last Tranche of Capital Conservation Buffer has been deferred by one year to September 30, 2021

    • Banks have been permitted to deal in Offshore Non-Deliverable Rupee Derivative Markets (Offshore NDF Rupee Market)

    A lot still depends on how effectively the spread of the virus is contained. A prolonged disruption in economic activity will deepen the probability of a global recession.

    However, RBI has taken some bold but welcome steps in these difficult times, covering all aspects of the economy. The worry of liquidity and defaults which many had feared has now been erased to an extent. It is now up to Banks and other financial institutions to do all they can to keep credit flowing to economic agents facing financial stress on account of the pandemic.

Warm Regards,
Divya Grover
Research Analyst

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