New Delhi: The Reserve Bank of India (RBI) Friday announced a sharp 75 basis points rate cut in key policy rates as it looks to revive growth and maintain financial stability.
The RBI also allowed all financial institutions, including banks, housing finance companies non-banking finance companies and micro finance institutions, to permit a three-month moratorium for term loans provided to borrowers that were outstanding as of 1 March 2020.
This will provide a huge relief to borrowers who will not have the pressure of paying equated monthly instalments at a time many have been left jobless or are facing non-payment of salaries.
RBI Governor Shaktikanta Das announced the decisions of the Monetary Policy Committee (MPC) in a video statement. The MPC was initially scheduled to meet on 31 March with an announcement set for 3 April, but the meeting was advanced given the circumstances.
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NPAs & other measures
The RBI allowed deferment of interest on working capital and the easing of working capital financing by banks to customers.
It also clearly stated that none of these steps will not result in an asset classification downgrade thereby ensuring that any borrower account will not be classified as a non-performing asset or NPA.
Calling it extraordinary circumstances, Das said the aim of the measures was to mitigate the negative effects of virus, to revive growth and preserve financial stability.
The RBI will continue to remain vigilant and take all steps necessary to mitigate the impact of Covid-19, Das said, adding the Indian banking system is safe and sound and the macroeconomic fundamentals of the Indian economy are strong.
The government has also announced a series of measures to protect the most vulnerable sections of Indian society and to protect businesses and taxpayers.
Also read: 3 critical steps Modi govt must take to protect people and economy during Covid-19 lockdown
Rate cut & liquidity
The six-member MPC voted with a 4-2 majority to reduce the policy repo rate to 4.4 per cent from the existing 5.15 per cent, Das said in his statement, adding that the committee agreed on maintaining the accommodative stance as long as necessary.
The committee also reduced the reverse policy repo rate by 90 basis points to 4 per cent to make it unattractive for banks to passively deposit these funds with RBI and instead lend it to productive sectors of the economy.
Das also announced a series of steps to improve liquidity in the system, including a 100 basis points reduction in the cash reserve ratio — the percentage of deposits that banks have to maintain with RBI — to 3 per cent from 4 per cent. Along with the other steps announced, it will lead to injecting Rs 3.74 lakh crore into the system.
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Cloudy growth forecast
For the first time in its history, the MPC refrained from making any growth or inflation projections but Das said the 4.7 per cent implied growth forecast for the fourth quarter of 2019-20 is under risk.
For 2020-21, Das said this kind of uncertain outlook has never been seen before and said that most sectors of the economy will be adversely affected, except probably for agriculture.
Striking an optimistic note, the RBI governor said, “..Tough times never last. Only tough people and tough institutions do.”
‘Reassuring words’
Finance Minister Nirmala Sitharaman welcomed the RBI’s move and stressed the need for timely transition of cut in policy rates.
Appreciate @RBI @DasShaktikanta’s reassuring words on financial stability. The 3 month moratorium on payments of term loan instalments (EMI) & interest on working capital give much-desired relief. Slashed interest rate needs quick transmission. #IndiaFightsCoronavirus
— Nirmala Sitharaman (@nsitharaman) March 27, 2020
Also welcome @RBI governor @DasShaktikanta’s statement: “The macro economic fundamentals of the Indian economy are sound, and in fact stronger than what they were in the aftermath of the global financial crisis of 2008-09.” And his timely reminder to #StayCleanStaySafeGoDigital.
— Nirmala Sitharaman (@nsitharaman) March 27, 2020
Dharmakirti Joshi, chief economist at ratings agency Crisil, said the cut in the cash reserve ratio and steps to ease borrowing costs for banks through long-term repo operations “should enable better monetary policy transmission and availability of credit to segments starved by the Covid-19 lockdown in the near term”.
In a note, Care Ratings said the steps announced should lead to lower lending rates. It added that the deferral would provide “relief to banks as their NPA levels would not increase (preserving capital for business instead of using it for provisions), and they were facing come challenges in actually collecting repayments from borrowers due to the lockdown”.
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Very appreciable step towards easement of burrden for small and medium sector and lower middle and middle income group.
Emi’s of 2/4 wheeler, housing/business loans, and other loans will be defferd giving sense of security for family that they will meet their basic requirements first.
My responses tend to be from the gut, so one feels relieved when a professional economist says the same thing. Ms Rupa Subramanya has tweeted : Economic activity has basically come to a standstill in India thanks to its draconian lockdown. This rate cut is really meaningless. Even before this crisis, monetary transmission had broken down. A cut right now is plain useless.
The RBI is skating on thin ice. It is ignoring inflation risks completely. Using up all of its gunpowder too early in the fight. A three month freeze on EMI payments will provide some relief to middle class families. Till we have a clearer picture of how long Covid 19 will last and how much damage it will cause, rate cuts will not stimulate growth. This is not a time to quibble, but having a central bank that is on the same page with the government on everything should not be considered a virtue.