WATCH RBI Governor Shaktikanta Das unveil $50 billion ammunition to keep the Indian economy breathing amidst coronavirus lockdown

• The Reserve Bank of India (RBI) announced steps that can release ₹3.7 lakh crore.
• The steps include a sharp 75 basis points cut in repo rate and a 90 basis points cut in reverse repo rate.
• Banks have been discouraged from depositing money with the RBI, and instead have been pushed to 'do whatever they can' to provide credit to those people and businesses affected by the novel coronavirus and the lockdown that followed.
• The RBI has also reduced the cash reserve ratio, pushed to boost working capital loans, eased compliance requirements, and the classification of bad loans.
• Banks have been permitted to trade in offshore rupee derivative market (the non-deliverable forwards market) from June 1, 2020.
• Governor Das appealed to the people not to resort to panic withdrawals of money from banks and assured that the depositors' money will remain safe.

The Reserve Bank of India unveiled a slew of measures that can together release nearly ₹3.7 lakh crore (nearly $50 billion) into the Indian economy while it fights the impact of the novel coronavirus and the lockdown imposed to contain the spread of the pandemic.

The monetary policy panel decided to cut repo rate by 75 basis points and the reverse repo rate by 90 basis points. The reverse repo rate has seen a sharper cut to disincentivise the banks from depositing money with the RBI. "Banks have been depositing ₹3 lakh crore daily with the RBI in the last few days," the RBI Governor said while citing that credit flow has stopped.

“Tough times don’t last but tough people and tough institutions do,” he added.


These are some of the highlights from the speech of RBI Governor Shaktikanta Das:

1. The new repo rate (the rate at which the RBI lends to banks) will be at 4.4% as compared to 5.15% earlier. The decision was taken after a 4:2 majority vote at the Monetary Policy Committee.

2. All commercial banks including regional, rural and others are being permitted to allow a 3-month moratorium of payment of installments on all terms loans outstanding as on March 1. 3-month deferment of interest on working capital facilities. Accumulated interest for the period will be paid after the exipiry of the deferment period.The moratorium on terms terms and deferment of internet on working capital will not result in asset classification downgrade. Banks and financial institutions must do all that they can to ensure credit flow, on easier terms, to all those affected by the novel coronavirus.

3. LTRO: Long-term redemption operations
These are instruments used to avail loans for working capital. RBI will conduct long-term repo of upt0 3 year tenor to the tune of ₹1 lakh crore. Investments made by banks will classified as 'hold-t0-maturity', and not under 'large exposures'. The first tranche of ₹25,000 crore will be issued today (March 27).

4. Cash reserve ratio of all banks will reduced by 100 basis points from March 28 for a period of 1 year. This will release about ₹1.37 lakh crore uniformly across the banking system. The reporting of minimum daily CRR balance will be reduced up to June 26 to 40% from the current 80% to ease the burden of compliance on bank staff. The marginal standing facility will be increased to 3% from 2%, opening up room for banks to borrow another ₹1.37 lakh crore, at reduced interest, from the RBI under the LAF window.

5. The steps announced above can release ₹3.7 lakh crore into the Indian economy. The RBI has injected ₹2.8 lakh crore (1.4% of India's GDP) since the last monetary policy review, and after today's announcements the total liquidity injection will be to the tune of 3.2% of GDP.

6. Banks have been permitted to trade in offshore rupee derivative market (the non-deliverable forwards market) from June 1, 2020 to improve efficiency of price discovery.

7. Retail inflation has been 30 basis points above the RBI estimate in January and February 2020 largely due to spike in onion prices. However, going forward, the aggregate demand may weaken further and oil prices may fall easing consumer price inflation. "The situation is fast changing, outlook is uncertain like never before, and therefore, the Monetary Policy Committee refrained from forecasting the impact of Covid-19 on GDP and inflation," Das said.

8. The last quarter of 2019-20 India's GDP was expected to grow at 4.7%. It is now at risk, the governor said. “If everyone follows the rules, some of the growth worries can be reduced," he added.

The government stimulus

Finance Minister Nirmala Sitharaman announced a series of steps to give cash, food, and other necessities to the poorest of the country while economic activity remained on halt. However, the ₹1.75 lakh crore ($22 billion) sustenance package announced on March 26 wasn't enough to lift the market's spirits.

The lock down has forced many businesses to shut down and factories have had to close their doors. As a result, a few people have been forced to take unpaid leave— like in the case of GoAir, Indigo, and AIESL with hyperlink to the story — with the uncertainty around when the Coronavirus crisis will finally end.

Not just on YouTube, but also on Twitter, many individuals are pleading with the government to provide some relaxation. Infosys co-founder TV Mohandas Pai joined in asking the government to provide at least 6 months of deferment on EMI and loan interests.

https://twitter.com/TVMohandasPai/status/1243093178183385089

It’s not just salaried employees but individuals who drive auto-rickshaws or those who drive Uber and Ola cabs who need more time to pay their loans since they won’t be able to ferry passengers during the lock down.

See also:
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Inside the $2 trillion US economic stimulus⁠— and what locked-down India can learn from it

Here's what India wants from Modi’s financial package

A look at Indian government response to coronavirus, so far, shows some quick reactions but not enough foresight