rbis-steps-to-ease-impact-of-lockdown-summary

Context:RBI has taken a series of conventional and non conventional measures in a move to fight the effects of the coronavirus on the financial system.

More about the news:

  • Businesses were clamouring for relief and RBI’s recent measures address the crucial factor of sustaining system liquidity while offering palliatives to individuals and businesses. 
  • These measures reflect the RBI’s willingness to listen to impulses from the ground and its effort to stay ahead of the curve.
  • This was the first time that the MPC met outside its bi-monthly meeting calendar. The policy was scheduled to be announced on April 3 earlier.

RBI’s three-pronged approach to ease the impact of lockdown

Move

Details

Significance

 

1.Ensuring ample liquidity and narrowing of the credit spreads of corporates

 

2.Lowering the cost of capital

1.Repo rate has been reduced to by 75 bps 4.4% from 5.15?rlier.

2.Higher reduction in Reverse repo by 90 bps point to 4%.

3.Reduction in cash reserve ratio by 100 basis points to 3 per cent.

4.Increae in Marginal Standing Facility

The higher reduction in the reverse repo rate compared to repo rate, is aimed at prompting banks to lend more rather than keeping their excess liquidity with the RBI.

Reduction in the CRR rates has released ₹1.37 lakh crore liquidity. This step along with other measures, will see an infusion of ₹3.74 lakh crore into the banking system.

RBI’s current liquidity injection amounts to nearly 3.4% of GDP.

 

3.Providing a moratorium on instalments for three months on all term loans of retail and corporate borrowers;applicable on both principal and interest 






 

This is related to EMIs on home, car, personal loans as well as credit card dues till May 31.

Beneficiaries:Individuals and companies who have availed term loans can benefit from this move.

Moratorium facility is available on terms loans extended by all commercial banks including regional rural banks, small finance banks and local area banks, co-operative banks, all-India Financial Institutions,NBFCs,MFIs.

The RBI has left it to the boards of banks to put in place an objective criteria to offer moratorium to its customers.

For banks:Non-payment of the EMIs will not lead to non-performing asset classification by banks.

For individuals:There will be no impact on the credit score of the borrowers.

For Corporates:This move is a big relief, especially for those companies that have low reserves and may not have the ability to repay.

The move will definitely give a breather to all companies, it will be a life saver for the micro enterprises, proprietors with small loans, as well as individuals such as taxi and auto drivers, or small shop owners, who are facing sudden loss of income.

SBI’s complementary actions:

  • SBI has promptly responded to the RBI’s action and reduced the lending rates linked to an external benchmark and the repo rate by 75 bps. 
  • Interest rate on external benchmark linked loans was cut from 7.8% to 7.05% and those linked to repo rate were cut to 6.65%. 
  • SBI has also cut retail fixed deposit rate by 20-50 bps across all tenures. 
  • Bulk deposit rates were reduced by 50 bps to 100 bps across tenors.

Way ahead

  • Banks need to pass on the cut quickly:
    • Existing borrowers will benefit assuming that banks pass on the cut quickly,considering the cut spurring fresh investment is the rare possibility for the businesses.
  • Need enlarging the benefit to the small borrower:
    • RBI has probably missed out enlarging the benefit to the small borrower. 
    • It could have avoided charging interest on outstanding loans during the three-month moratorium period at least for loans of smaller ticket size.
  • Need of complementary strong fiscal measures
    • RBI measures would alleviate cash flow problems and prevent the liquidity problem from turning into a solvency problem for firms. 
    • But they will have only a limited impact on the key problem of income loss.
    • This has to be the government’s role, and could be achieved more by enhancing fiscal support.
  • Reducing consequences created due to large sell-offs in markets:
    • RBI will also conduct LTRO (long term repo operations) of up to 3-year tenure of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate. 
    • The first auction of Rs 25,000 cr will be conducted soon.
    • Liquidity availed through this route will have to be deployed in corporate bonds, commercial papers, and debentures. 
    • This will bring liquidity to the corporate bond market, and will lead to a fall in yields which have risen in the recent weeks.
  • Consequences of heightened liquidity?
    • Currently while understanding the gravity of the situation,the priority is to keep the system lubricated.
  • Necessity of more proactive actions:Current measure is a good start by the RBI but it needs to keep thinking on its feet and react quickly as the situation evolves.There will be more to do as the crisis evolves in future because this is a kind of crisis that they have not dealt with before.

About Monetary Policy Committee (MPC)

About

It is a committee of the Reserve Bank of India which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation targets at 4% (with a standard deviation of 2%) 

Provisions

Monetary Policy Committee is defined in Section 2(iii)(cci) of the Reserve Bank of India Act, 1934 and is constituted under Sub-section (1) of Section 45ZB of the same Act.

Composition of MPC

The Central Government constitutes the MPC through a notification in the Official Gazette.

MPC has six members, - 

  • The RBI Governor (Chairperson), 
  • The RBI Deputy Governor in charge of monetary policy, 
  • One official nominated by the RBI Board and 
  • The remaining three members would represent the Government of India.
 

Decision making

The proceedings of MPC are confidential and the quorum for a meeting shall be four Members, at least one of whom shall be the Governor and in his absence, the Deputy Governor who is the Member of the MPC.

The MPC makes decisions based on majority vote (by those who are present and voting). 

In case of a tie, the RBI governor will have the second or casting vote

The decision of the Committee would be binding on the RBI.