Key Measures Taken By Reserve Bank Of India In Wake Of Coronavirus: An Analysis
Mar. 30, 2020 • Architi Batra
India, Asia`s third-largest economy has been locked down for three weeks since March 25, 2020. This lockdown has put various businesses and individuals along with daily wage earners in unprecedented hardship.
A day after the government of India announced a Rs 1.7 lakh crore package of free foodgrains and cash doles to the poor to deal with the economic impact of the lockdown, the central bank of India has announced various regulatory and financial measures including both conventional and unconventional means. Such measures special lines of liquidity, loan moratorium, and easier asset quality norms, to help the economy survive over the crisis stemming from the novel coronavirus pandemic.
Moody's Investors Service also cut India's growth forecasts for the 2020 calendar year to 2.5% from 5.3% in the wake of coronavirus(1) and such instability had to be dealt with immediately. The Monetary Policy Committee (MPC) of the RBI, formulator of the monetary policy in the country advanced its meeting by a week to meet the challenging circumstances the economy is in and the following measures have been undertaken by RBI.
MEASURES UNDERTAKEN
- Reduction in repo rate and reverse repo rate: The MPC decided to reduce the repo rate by 75 basis points from 5.15 percent to 4.4 percent, lowest in at least 15 years. The reverse repo rate was also cut by 90 bps to 4 percent.
- Repo Operations: RBI also decided to undertake repo operation to infuse Rs 1 lakh crore. Auction of targeted long term repo operations of 3-year tenor for total amount Rs 1,00,000 crore at a floating rate.
- Reduction of Cash Reserve Ratio: Reduction of CRR for all banks by 100 basis points to 3 percent was also announced which will release Rs 1,37,000 crore across the banking system in the country.
- Marginal Standing Facility: Accommodation under the Marginal Standing Facility was declared to be increased from 2% from SLR to 3% with immediate effect till June 30 which will further release Rs 1.37 lakh crore into the system.
- A moratorium of three months: A moratorium of three months of EMIs on all outstanding loans, falling due from March 1, 2020, to May 31, 2020, has been declared. There will not be any hit on credit score or asset quality of the underlying borrower and EMIs will resume after the moratorium period gets over. The 3-month moratorium will apply to corporate loans, home loans and car loans along with personal loans.
- Deferment of Interest: The banking regulator also deferred interest payment on working capital loans by three months including principal and/or interest payment, bullet repayments, equated monthly installments (EMIs), and credit card dues. The accumulated interest is allowed to be paid after the deferment period is over.
IMPACT OF THE MEASURES UNDERTAKEN
The various measures taken up by the RBI will have a severe impact on the economy. The steps, especially in regards to repo rate and cash reserve ratio would help push lending rates down and further encourage banks to infuse money into productive sectors, infuse liquidity and mitigate the impact of pandemic COVID-19.
The noticeable objective of such measures, as per RBI includes:
(i)To Augment liquidity to facilitate financial markets.
(ii)To Reinforce monetary transmission to help those who have been affected by the pandemic.
(iii)To Relax repayment to reduce financial stress.
(iv) To improve access to working capital.
(iv)To improve the functioning of markets.
The lending institutions have also been assured confidence in lending due to the provision of liquidity and regulatory reliefs. The cut in repo rate cut will cause the interest on floating rate housing loans to come down and this will help in increasing household cash flow. The substantial reduction in the CRR will also help banks to reduce their lending rates and thus, aid monetary transactions.
The moratorium provided will improve the cash position of individuals as well as support the cash flow of firms. RBI has followed a nuanced approach in offering the moratorium by not making it mandatory for every borrower to necessarily avail the moratorium. It is a matter of self-selection and if a corporate, SME or individual is not financially stressed, they can continue to repay their obligations to the lending institutions. This is to ensure that only the genuinely financially stressed bodies avail the relaxation.
The measures undertaken to shield the domestic economy would also bring down the cost of capital to ensure further investment. Indian shares were also volatile in trading Friday after the central bank slashed interest rates to mitigate the coronavirus impact on the economy(2).
It is necessary to revive growth in the economy of India and mitigate the impact of COVID-19. However, it also has to be ensured that inflation remains within the target. The measures were significant in order to minimize the adverse macroeconomic impact of the pandemic. The credit flowing to economic agents needs to be secured.
As stated by the Prime Minister, Narendra Modi, the measures will improve liquidity, reduce the cost of funds and provide for the middle class and businesses. RBI has also stated that it has intended to (a) mitigate the negative effects of the virus; (b) revive growth; and above all, (c) preserve financial stability(3).
CONCLUSION
The RBI’s decision on Friday put it on a similar path as the other affected countries` central banks. Other central banks have also eased their monetary policies to help support their economies from the coronavirus pandemic. In addition to this, the RBI governor’s statement that ‘whatever steps are necessary including all instruments, conventional and unconventional is on the table’(4), provides an assurance that if the problem continues to exist, people will be provided with proper regulatory measures by the RBI to work for the ultimate benefit of the economy.
[Madri Chandak, a student of Hidayatullah National Law University is in her second year and has a keen interest in the economic and commercial aspects of the law.]
- ET Bureau, Moody’s cuts India growth forecast to 2.5%, THE ECONOMIC TIMES (March 29, 2020, 10:34 PM), https://economictimes.indiatimes.com/news/economy/indicators/moodys-slashes-india-gdp-growth-in-2020-to-2-5/articleshow/74840446.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.
- Saheli Roy Chaudhary, Indian stocks see volatile trading after the central bank cuts rates to ‘mitigate’ coronavirus impact, CNBC (March 28, 2020, 1:30 AM), https://www.cnbc.com/2020/03/27/indian-stocks-the-central-bank-rate-cut.html.
- Governor’s Statement - Seventh Bi-monthly Monetary Policy Statement, RESERVE BANK OF INDIA, 2 (March 30, 2020, 13:40 PM), https://rbidocs.rbi.org.in/rdocs/Content/PDFs/GOVERNORSTATEMENT5DDD70F6A35D4D70B49174897BE39D9F.PDF.
- Ibid.