COVID-19: RBI announces measures

ECONOMY

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

COVID-19: RBI announces measures

After Finance Ministry announced the 1.7 Lakh Crore relief package, the RBI also has come up a slew of measure to help the economy tide over distress caused by COVID-19 pandemic. 

Do You Know?

• Since February 2020, RBI has pumped in ₹2.8-lakh crore in the system through various market interventions (like LTRO, OMO)
• US Federal bank has reduced its interest rates to near zero to shore up liquidity in its financial system

Relief measures announced by RBI are:

• Repo Rate: cut by 75 basis points to 4.4% – To ease credit lending in the economy
• Reverse Repo rate: Reduced by 90 basis points to 4% 
• Cash Reserve Ratio(CRR): Reduced by 100 basis points to 3% of net demands and time liabilities – will inject ₹1.37-lakh crore into the system
• Accommodation under Marginal Standing Facility to be increased from 2% to 3% of SLR. This will release Rs 1.37 lakh crore into the system.
• All term Loan repayment: Moratorium i.e. Temporary halt of three months on payment of instalments 
• Long term repo operations will be carried out by RBI to inject liquidity to the tune of ₹1 lakh crore 
• The cumulative liquidity boost provided by RBI through above measures amounts to ₹3.74-lakh crore

Impact of RBI’s actions

• Compliments the efforts of government to address the economic upheaval caused by COVID-19 pandemic
• Reduction of Repo rate lowers the cost of capital 
• Reduction of Reverse Repo will disincentivise banks from parking their funds with the RBI
• Prevent credit market dislocation
• Relief to all retail & corporate borrowers who are finding it difficult to service their loans during this crisis period
• Protects against defaults & banks’ rising NPAs
• Ensures ample liquidity and narrows the credit spreads of corporates
• It reflects the RBI’s willingness to listen to problems faced at ground level and its effort to resolve them.
• Adaptability: RBI has stated that it will not shy away from using both conventional and unconventional measures in future to adapt to the evolving situation
• Helps in reassuring Public trust in the Banking system during this crisis period

Challenges

• Monetary Transmission: To ensure quick liquidity transmission to the larger economy and not just to investment grade companies. 
• Consequences of heightened liquidity like Inflation which needs to tackled in future
• Fresh investment will be the last thing on the minds of businessmen who are currently grappling with unsold inventory & disrupted supply chain
• Inadequate action by RBI to ease the corporate securities market (suggestion is direct buying of Corporate Bonds like US Fed)
• There could be a sharp rise in bad loans a few quarters after the end of the moratorium 
• RBI has stopped short of providing material relief measures for medium and small enterprises, which are likely to bear the brunt of shutdown

Connecting the dots:

• Abenomics that includes Negative Interest rates
• How central banks can ensure smoother & quicker monetary transmission?