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?
