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RBI announces a second booster shot to the economy as it fights COVID-19

RBI measures

Addressing his second media briefing since the domestic COVID-19 pandemic broke out, Reserve Bank of India’s Governor, Shaktikanta Das announced a slew of measures aimed at easing financial distress in the country as it enters the second phase of its lockdown. Besides addressing the problems faced by different sectors of the economy, these announcements are also significant in their timings- in the background of downgrading India’s economic growth rate in this fiscal by global institutions. Recently, the World Bank predicted India’s growth rate to be in the range of 1.5-2.8 per cent for 2020 whereas the International Monetary Fund forecast a dip to 1.5 percent; Barclays has projected zero growth for India in 2020, highlighting the challenges lying ahead for the Indian economy. 

Speaking on the economic troubles fueled by the COVID-19 outbreak and the resulting countrywide lockdown, the Governor asserted that today’s measures were announced with the objective of maintaining enough liquidity in the economy, facilitating credit flows, easing financial stress and enabling a smooth functioning of the markets. He further noted that inflation was rapidly falling in the country and may well fall the 4 per cent target by the second half of this fiscal year. 

Today’s announcements followed another set of measures which were announced in the last week of March (27th March) amounting to over Rs. 3.74 lakh crore which saw the reduction of the repo rate by 75 basis points and the reverse repo rate by a larger margin of 90 basis points while at the same time also reducing the Cash Reserve Ratio (CRR) by 100 basis points to allow banks to have more money they could lend to consumers. This was coupled with a three-month moratorium for term loans in a bid to lessen the pressure on end consumers and borrowers as economic activity remains at a standstill across the country. 

Key takeaways from the Governor’s media address are listed below: 

1.    The reverse repo cut has been cut by 25 basis points, bringing it to 3.75 percent from the existing 4 per cent. 
2.    The repo rate remains unchanged. 
3.    Following up on the 27th March announcement of a Targeted Long Term Repo Operations (TLTRO) window worth one lakh crore rupees for investing in corporate bonds, this time another TRTRO, specifically aimed for Non Banking Financial Institutions (NBFCs) amounting to Rs. 50,000 crores has also been announced. 
4.    The central bank has also announced a relaxation on asset classification norms. 
5.    With regards to NPA classification, the accounts that availed the three-month moratorium benefit, their moratorium duration will now be exempted from the RBI’s 90-day NPA classification norms.
6.    The RBI has increased the limit under Ways and Means Advances for states to avail short-term funds to 60 per cent of the existing limit to help the economic situation in states and allow them to better plan their borrowings in these challenging times. 
7.    To help banks, the Liquidity Coverage Ratio has been brought down to 80 per cent from the existing 100 per cent. It will be restored in a staggered manner by April 2021 while banks have been asked not to make any dividend payments until further orders. 
8.    For struggling financial institutions like NABARD, SIDBI and NHB, a special refinance facility amounting to Rs. 50,000 crore, has been announced to fulfill their sectoral credit needs. 
9.    This will include Rs. 25,000 crores to NABARD for refinancing RRBs, co-operative banks and micro-finance institutions, Rs. 15,000 crore to SIDBI and Rs. 10,000 crore to National Housing Bank (NHB) for supporting Housing Finance Companies (HFCs).

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