RBI: Once again for the rescue

24/05/2020

The RBI has once again stepped up to the plate at the right time with measures that will reduce the cost of capital and ease the financial burden on businesses due to the extended lockdown. With Friday’s repo rate cut of 40 basis points, the RBI has shaved off 1.15 percentage points from the rate chart in the 58 days since the lockdown began, bringing the repo rate down to 4% and the reverse repo rate to 3.35%. RBI has advanced the Monetary Policy Committee (MPC) meeting for second time since March, extended the three-month moratorium of loan repayments, from June 1 to August 31 and raised the limit on banks’ group exposure to companies. The MPC had voted to maintain its accommodative stance, implying more rate cuts in the future if the need arises. In its first official forecast for economic growth, the central bank said the gross domestic product (GDP) is likely to contract in FY21 (April 2020 to March 2021) as a direct fallout of the outbreak of coronavirus and ensuing lockdown. Even before the Coronavirus outbreak, the Indian economy was experiencing a slowdown, with GDP growth declining to a projected 4.9 per cent in 2019-20 fiscal, its slowest pace in the last decade. India has been under lockdown since March 25 to contain the spread of the virus, resulting in supply disruptions and demand compression. Supplementing Government’s COVID-19 stimulus that mostly comprised of credit lines to small business and farmers, RBI will be facilitating the flow of funds at affordable rates and revive animal spirits. The RBI will continue to remain vigilant and in battle readiness to use all its instruments and even fashion new ones, as recent experience has demonstrated, to address dynamics of the unknown future. The moratorium on interest on working capital was also extended by three months. Also, interest accumulated for the six-month moratorium period can be converted into a term loan, Das said adding the rescheduling of payments on account of the moratorium/deferment will not qualify as default. Bank exposure to corporates has been raised to 30 per cent of the group’s eligible capital base from the current limit of 25 per cent, a move that will provide headroom for additional credit required by large corporates. Headline inflation may remain firm in the first half of the year and may ease in the second half. Inflation may fall below 4 per cent in the third or fourth quarter of the current fiscal.

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