The Reserve Bank of India on Friday took steps to combat the economic fallout of the COVID-19 pandemic, which has resulted in a three-week nationwide lockdown and a near-halt of almost all economic activity.
RBI governor Shaktikanta Das outlined, via video conference, the ways in which the central bank was seeking to allay fears of a liquidity freeze and upward inflationary movements. At the same time, though, he also said that India’s economic growth was likely to be affected because of the pandemic.
Here are the highlights of the governor’s speech:
Repo rate and reverse repo rate:
The repo rate – the rate of interest at which a central bank lends money to commercial institutions – was slashed by 75 basis points to 4.4% from 5.15%. At the same time, the RBI also cut the reverse repo rate – the rate at which it borrows from banks – by 90 basis points to 4%.
The move is likely to free up the flow of money in the economy and encourage banks to continue their lending activities at lower interest rates. The spread of the virus has brought back fears of a liquidity crunch for businesses and financiers, akin to the one brought on by the collapse of IL&FS Ltd in September 2018.
Reduction in cash reserve ratio:
The RBI also cut the cash reserve ratio – the minimum portion of customer deposits that commercial banks must hold as reserve – by one whole percentage point to 3%. The move will release around Rs 1.37 trillion into the overall banking system. The lower CRR will remain in place till March 26 next year.
Further, the central bank reduced the requirement of minimum daily CRR maintenance to 80% from 90%. “This is a one-time dispensation available up to June 26, 2020,” the RBI said in its policy statement.
In conjunction with the cuts in the repo and reverse repo rates aimed at easing liquidity flows, the move is also expected to ease the functioning of banks. Many commercial financial institutions are currently keeping a bare minimum of branches open in order to comply with social distancing norms set down by the government.
Moratorium on term loans:
As part of its policy move, the RBI said it had granted permission to all commercial banks, co-operative banks, financial institutions and non-banking financial companies – including housing finance companies – to allow a three-month moratorium on instalment payments for term loans and shift their repayment schedule accordingly.
This means people who have taken on loans to purchase homes and cars, among others, won’t face any penal action for not repaying EMIs for three months starting April. However, this moratorium doesn’t apply to credit card EMIs.
The RBI, however, said that “interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period”.
Separately, lending institutions are being permitted to allow a three-month deferment on the payment of interest with respect to working capital facilities. The accumulated interest will be paid after the expiry of this deferment period, the RBI said.
This move is likely to ease the pressure on companies and borrowers’ cash flows, allowing them to commit their capital to resources including labour payments and emergency reserves.
GDP growth to be affected:
The RBI also said that the economy was likely to be impacted because of the virus and its effect on global markets.
“Anecdotal evidence suggests that several services such as trade, tourism, airlines, the hospitality sector and construction have been further adversely impacted by the pandemic. Dislocations in casual and contract labour would result in losses of activity in other sectors as well,” the central bank said.
It went on to say that equity markets were facing massive sell-off pressures from foreign portfolio investors, and that domestic financial conditions had tightened considerably.
Silver lining for India in crude oil prices:
While markets and the economy will continue to face the volatility brought on by the spread of the virus and the lockdown, a plunge in international crude oil prices may bring relief to companies and customers, “to the extent it is allowed to pass-through”, the RBI said.
A price war between Russia, Saudi Arabia and other oil producers as well as lower overall demand have resulted in around a 45% fall in international crude oil rates.
However, the Indian government has increased excise duties on the retail price of petrol and diesel to mop up additional revenue.
The RBI’s announcements and rate cuts come a day after the central government on Thursday announced a 1.7 lakh crore ($22.6-billion) economic stimulus plan providing direct cash transfers and food security measures to give relief to millions of poor people hit by the nationwide lockdown over the coronavirus pandemic.