India’s apex bank – the Reserve Bank of India (RBI) unveiled several measures Friday to combat ailing economy which is facing twin problems of economic slowdown amid fifth of the global countries forced into lockdown in an attempt to stop outbreak of Coronavirus.
RBI Governor Shaktikanta Das, in a media statement highlighted various steps taken to tackle the grim situation in the country.
He mentioned about calling an urgent meeting of Monetary Policy Committee (MPC), which was scheduled next week, to asses the liquidity conditions and provide relief to stressed sectors.
MPC voted for a sizable reduction in Repo rate while maintaining accommodative stance. The Repo rate is cut by 75 basis points to 4.40% vs 5.15% earlier, while the Reverse repo cut by 90 bp to 4%. Liquidity Adjustment Factor or LAF has also been cut by 90 bps to 4%.
These decisions of MPC was warranted by disruptive force of Coronavirus. Das underlined the fact that we are living through an extraoridinary situation and recognised of making effort to combat COVID-19.
RBI is monitoring financial markets and sees the need for additional monetary support.
With the global economic acitivity coming to standstill, the future outlook remains heavily contingent upon intensity, spread and duration of pandemic.
The governor highlights the probability of global economy slipping into recession. Hence, India’s GDP growth of 5% is at risk. Most sectors except for Agriculture likely to be impacted by intensity, spread and duration of COVID-19.
If COVID19 is prolonged, global slowdown could deepen with adverse implication for India. Fears of inflation are looming large which add to downside risks.
Looking ahead food prices may soften further and could work towards easing pressures. Aggregate demand may weaken due to COVID-19; leading to ease in inflation.
The MPC noted macroeconomic risks brought on by pandemic and hence priorities are set to undertake strong, purposeful action to protect domestic economy.
RBI also allowed banks and other lending institutions to extend the repayment schedule and moratorium by three months to avoid large NPAs and reduce risk weights. This would apply to all term loans as RBI also allowed all lending institutions to allow a moratorium up to three months for all loans outstanding as at March 1, 2020.
Over the past few days, the central bank has taken aggressive liquidity management measures, infusing some Rs 3.80 lakh crore liquidity into the system through various repo measures undertaken on a regular basis.
On Friday, the central bank was conducting a record Rs.3.5 lakh crore reverse repo exercise, aiming to correct the anomalies between two overnight interest rates.
Friday’s variable reverse repo auction would allow banks to park their excess cash in the system, sloshed with about Rs 2.60 lakh crore of liquidity. The tenor of these auctions will be 13 days. So, banks will earn interest on the money they park for the period.
Highlights of RBI announcement:
* Cuts repo rate by a whopping 75 basis points to 4.4%, lowest ever
* Lowers reverse repo rate by 90 basis points.
* Cuts CRR by 100 bps to 3%, unlock Rs 1.37 lakh crore liquidity
* Allows banks, other lenders to extend loan repayment schedule and moratorium by 3 months
* Assures depositors their money is safe, bank stocks crash should not worry them.
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