Coronavirus update: RBI’s booster shot to fight Covid-19 battle

Updated on Mar 28, 2020 02:35 AM IST

Covid-19 update: Shaktikanta Das, the governor of RBI, said the bank would do “whatever it takes” to address the coronavirus crisis.

RBI Governor Shaktikanta Das said about Rs 3.74 lakh crore liquidity on aggregate basis will be infused into the financial system to deal with the COVID-19 pandemic.(PTI File Photo)
RBI Governor Shaktikanta Das said about Rs 3.74 lakh crore liquidity on aggregate basis will be infused into the financial system to deal with the COVID-19 pandemic.(PTI File Photo)
Hindustan Times, New Delhi | ByRajeev Jayaswal, New Delhi

The Reserve Bank of India (RBI) on Friday announced the steepest cut in the policy rate since 2008, a three-month holiday on all EMIs (including on home loans), a sharp cut in the amount of money banks need to keep with the central bank as reserve, and infused Rs 3.74 lakh crore of liquidity to reassure and stabilise India’s financial system in the wake of the Covid-19 pandemic.

India is now on Day 3 of a three-week lockdown to combat the coronavirus crisis.

More than once in the course of his briefing on Friday, Shaktikanta Das, the governor of RBI, said the bank would do “whatever it takes” to address the crisis. The Monetary Policy Committee of RBI brought forward its scheduled April credit policy announcement and effected a 75 basis points (0.75 percentage point) cut in the rate at which it lends to banks (also called repo rate). This is the lowest interest rate India has seen.

The move came a day after Union finance minister Nirmala Sitharaman announced a 1.7-lakh crore package to help some of the weakest sections of the population to cope with the impact of the lockdown.

“It is worthwhile to remember tough times don’t last; only tough people, and tough institutions,” Das said while making the announcements.

“The intent is to mitigate the negative effect of the virus, revive growth, and above all preserve financial stability,” he added.

The central bank has done this in three main ways.

One, even while reducing the rate at which it lends to banks to 4.4%, it has further reduced the rate at which it pays banks who keep money with it (the so-called reverse repo rate) to 4%. This makes it more attractive for banks to lend than to just keep money with the central bank — something that is expected to transmit the rate cut better.

Previous rate cuts by RBI have not always been transmitted quickly. RBI said the instalments will include payments falling due from March 1 to May 31.

Two, with businesses hit hard by the pandemic and the lockdown, RBI announced a moratorium on loan payments for three months. This applies to home loans, car loans, and personal loans. Credit card dues are also part of the list. It also applies to all term loans and working capital loans across all types of lenders, banks, microfinance institutions, and non-banking finance companies. Banks have been told they can restructure these working capital loans without making any change in asset classification — something that would have hit both the borrower and lender.

While loan moratoriums usually involve an extension of the loan period (in this case by three months), most also involve an additional interest that is charged on a simple interest basis. The EMI holiday, and the fact that the interest rate cut will further prune EMIs, will likely benefit tens of thousands of individuals, some of whose livelihoods or businesses have been affected by the pandemic. More clarity on the moratorium is expected over the next few days from the lenders whose boards will have to approve it.

Three, it has announced measures to calm nervous financial markets. Part of this is through the infusion of Rs 3.74 lakh crore of liquidity into the system, including through a cut in the cash reserve ratio by a full percentage point to 3%, the lowest since at least 1962, and Rs 1 lakh crore that will be spent on so-called long-term repo operations (this will effectively incentivise banks to invest in high-quality corporate bonds).

Analysts were especially appreciative of the latter because it stabilises and strengthens the bond market. Half of the investments will have to be in the primary market for bonds and half in the secondary market, according to the announcement. Interestingly, the securities will not be in the so-called mark-to-market category where they have to reflect market prices (constantly dipping at a time such as this) but in the held-to-maturity one, and they are also excluded from calculations of the large exposure framework of banks.

The tone and tenor of RBI’s announcements seem to suggest that this could be expanded if the need arises.

Some of the liquidity also comes from a decision by the central bank to allow banks to borrow from RBI’s so-called marginal standing facility up to 3% of their statutory liquidity ratio (18.25% of deposits that are held in a mandated corpus of government securities). This was 2% earlier, and the increase of a percentage point will free up Rs 1.37 lakh crore (this is part of the Rs 3.74 lakh crore).

RBI’s actions were cheered by the Prime Minister and the finance minister. “Today, @RBI has taken giant steps to safeguard our economy from the coronavirus,” Narendra Modi tweeted. He expected the bank’s decisions to help “the middle-class and businesses”. Finance minister Nirmala Sitharaman tweeted that the measures announced would offer “much-desired relief” to borrowers.

“The MPC is of the view that macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic,” RBI said in a statement. While RBI usually provides growth estimates along with credit policy statements, Friday’s statement offered none.

Still, it is clear that the Covid-19 pandemic will hurt economies around the world. On Thursday, US federal Reserve chairman Jerome Powell said he thinks the US could already be in recession. In India, some economists have said growth could slip to 3.5% in 2020-21; one report estimates a sharper drop, to 2.5%.

Although stock market indices cheered the central bank’s announcements (they rose soon after them), they eventually gave up much of their gains and closed in the red with BSE’s Sensex closing 0.44% lower than on Thursday. The Indian currency and bonds rallied after the announcement, though. The rupee gained 1% and was trading at ~74.36 to the dollar in the afternoon on Friday and yield on 10-year bonds fell 24 basis points to 5.98%, the lowest since 2009.

Bond yields and prices move in opposite directions. A basis point is a hundredth of a percentage point.

Economist Pronab Sen said that while there is “a huge increase in potential liquidity in the system, the real question is what we expect on the demand side”.

Another group of experts said the move could begin to give immediate results. “We think the RBI delivered more than was expected, and touched upon each of its functions — setting rates, infusing liquidity, and overseeing regulation. Some benefits of these steps are likely to show up immediately while others could help in the reconstruction process once the 21-day lockdown, and more broadly the COVID proliferation is behind us. We expect growth to halt in 1HFY21, but rise sharply in 2H as inventory restocking demand kicks in,” said HSBC India’s chief economist Pranjul Bhandari and economist Aayushi Chaudhary in a research report.

On Thursday, Powell said the US central bank would continue to keep credit flows going in the US financial system. “When it comes to this lending, we’re not going to run out of ammunition,” he added. “That doesn’t happen.”

RBI’s Friday actions are an indication that Das thinks the same way.

“RBI has now put to rest the concern that it was failing to appreciate the required pivot to emergency conditions,” Suyash Choudhary, head of fixed income at IDFC Asset Management Company said in a note.

(with agency inputs)

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