Coronavirus Crisis: RBI injects Antidote

The RBI Monetary Policy Committee (MPC) meeting which was scheduled to be held on 31st March 2020 has been called in advance on 27th March 2020 looking into the pandemic situation developed due to the Coronavirus crisis. While the monetary policy is a decision taken on a regular interval this seventh bi-monthly monetary policy is considered as an antidote for the Indian economy during this time of Coronavirus crisis.

The highlights of the RBI Monetary Policy Committee Meeting are:
  • Repo Rate has been reduced by 75 basis points to 4.4%
  • Reverse Repo Rate reduced by 90 basis points to 4%
  • Cash Reserve Ratio (CCR) reduced by 100 basis points to 3%
  • Minimum daily CRR balance reduced from 90% to 80% till 30th June 2020.
  • Three months of moratorium granted on Term Loans including EMIs
  • Interest on Working Capital facilities to be deferred by three months and such deferment shall not be considered as Non Performing Assets (NPA).
To put it in summary and how this is going to impact the economy; the measures taken by the RBI can be broadly classified into two categories, one from the perspective of Lender and other from the perspective of Borrower:
From the perspective of Lender 

Basically, what the RBI has done here is cutting the Repo Rate which means the Banks will borrow money from the RBI at a lower rate thus passing on the benefit to customers who would in turn borrow from the Banks.

The second measure was reducing the Reverse Repo Rate. Reverse Repo Rate is the rate which Banks earns when they deposit their money with the RBI. So, just by cutting the Reverse Repo Rate, the RBI is asking the Banks to infuse more money into the economy so as to increase the liquidity.

Another big measure was reducing the CRR by 100 basis points. Cash Reserve Ratio (CRR) is the amount of money that the banks are supposed to deposit with the RBI in cash. The earlier CRR ratio was 4% which was brought down to 3% which means the Banks will now have additional 1% in their hand to distribute in the economy thus again increasing liquidity in the market which would be very useful for businesses and corporate houses.

A very big announcement made by RBI was on LTRO (Long Term Repo Operations) which stated that the Banks can borrow money from the RBI for three years, however; they will have to utilize that money for purchasing Corporate Bonds. Now, this is a huge and bold step taken by the RBI as a confidence building measure.

While apart from the above, there were various other measures announced by the RBI to deal with the Coronavirus crisis, but these were some major announcements which are largely interesting from the point of view of small and medium businesses.

From the perspective of Borrower

Coming to the Borrowers’ benefit or how is the monetary policy going to benefit the Borrowers, the RBI has also left no stone unturned to boost the sentiment of the borrowers.

The biggest cheer would be that a moratorium of 3 months has been granted to the borrowers on Term Loans. This means that the borrowers would not have to pay the interest for 3 months now however it has been deferred. So, to put it simply, the interest or EMI has not been waived off by the RBI but the borrowers have been granted a relief of 3 months. This way a lot of corporate houses who borrowed money would not have to keep paying EMIs for the next 3 months and the same can be deferred for 3 months.

The other big announcement was deferment of Interest on Working Capital Facilities as well. Here also, the RBI has announced that the working capital facilities in the form of Cash Credit or Overdraft and the interest payable thereon shall also be granted a moratorium of 3 months. And in both the above cases, the deferment would not tantamount to downgrade of assets; i.e; it shall not be treated as Non Performing Assets (NPA).

The third big thing which would definitely give a boost to corporate houses is the announcement of RBI on easing the Working Capital Financing. The lending institutions are allowed to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. This would help the corporate borrowers to get more funds from the Banks.

These are some host of measures taken by the RBI to ensure that the financial stress is reduced and corporate houses can continue doing business in these troubled times.

Given the recent scenario in the Yes Bank and the PMC Bank, the RBI Governor has also ensured that the public money kept in Private Banks are safe and there is no need to worry about the safety of deposits and people should not go for panic withdrawal.

The RBI Governor also stated that they are keeping a close eye on the economy and shall take all necessary steps and actions to counter this tough situation.

 

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