Mumbai:
The RBI on Friday put on hold EMI payments on all term loans for three months and cut interest rate by steepest in more than 11 years as it joined the government effort to rescue a slowing economy that has now got caught in coronavirus whirlwind.
The Reserve Bank of India (RBI) cut repo to 4.4 per cent, the lowest in at least 15 years. Also, it reduced the cash reserve ratio maintained by the banks for the first time in over seven years. CRR for all banks was cut by 100 basis points to release Rs 1.37 lakh crore across banking system.The reduction of CRR for all banks by 100 basis points to 3.0 per cent of net demand and time liabilities (NDTL) will be effective from the reporting fortnight beginning March 28, 2020.
The reverse repo rate was cut by 90 bps to 4 per cent, creating an asymmetrical corridor.
The measures announced come a day after the government unveiled a Rs 1.7 lakh crore package of free foodgrains and cash doles to the poor to deal with the economic impact of the unprecedented 21-day nationwide lockdown.
RBI Governor Shaktikanta Das predicted a big global recession and said India will not be immune.
It all depends how India responds to the situation, he said.
“The monetary policy committee noted that macroeconomic risks both on the demand and supply side brought on by the pandemic could be severe,” said Das via video conference.
Global slowdown could make things difficult for India too, despite some help from falling crude prices, Das said, adding food prices may soften even further on record crop production.
Aggregate demand may weaken and ease core inflation further, he noted.
The liquidity measures announced include auction of targeted long-term repo operation of 3 year tenor for total amount of Rs 1 lakh crore at floating rate and accommodation under Marginal Standing Facility to be increased from 2 per cent to 3 per cent of Statutory Liquidity Ratio (SLR) with immediate effect till June 30.
Combined, these three measures will make available a total Rs 3,74,000 crore to the country's financial system.
After cutting policy rates five times in 2019, the RBI had been on a pause since December in view of high inflation.
Earlier this week, RBI's MPC had held an unscheduled meeting to zero in on possible emergency measures.MPC voted 4-2 in favour of the reduction of the repo rate by 75 bps,Das said that the members of the MPC met on March 24, 26, and 27.
“We are living through an extraordinary and unprecedented situation. Life in the time of COVID-19 has been one of unprecedented loss and isolation. Everything hinges on the depth of the COVID-19 outbreak, its spread and its duration. Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode,’’ said Das.
RBI’S BAZOOKA
The RBI permitted banks to provide a three-month moratorium on all term loans and said it stands ready to provide necessary liquidity and take all measures essential to preserve financial stability in the domestic economy.
“The RBI has pulled out its bazooka,” said Prithviraj Srinivas, chief economist at Axis Capital.
“It has pulled down the cost of capital through deep policy rate cuts, it has increased the quantity of money through CRR cuts and asset purchases, and more importantly reduced financial stress in the economy through its 3-month moratorium on all term loans as well as working capital”.
These measures would provide a huge relief for individuals as also companies particularly the small and medium sized firms which have been forced to shut operations due to the nationwide lockdown on account of the virus outbreak.
Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Life Insurance Company said “The market has been patiently waiting for our central banks action in light of what all global central banks have done till now post the COVID 19 scare. The MPC has come with really big measures including rate cuts, CRR cut, Floating rate long-term repos for investment grade corporate bonds and CPs, forbearance on loans in terms of moratoriums and deferral of interest payments, capital conservation buffer deferment by 6 months, Offshore NDF market relaxations. This seems to be a comprehensive package and very necessary at this stage when growth will be under pressure.”
“The RBI surpassed expectations by delivering more than what the market had anticipated, and its promise to ‘do whatever it takes’ has come good,” said Rahul Bajoria, India chief economist at Barclays.
The measures “will help to assuage the markets in these increasingly unsettled times and offer some protection against widespread defaults, even though the actual impact on boosting economic activity may be limited,” said Aditi Nayar, Principal Economist at rating agency ICRA.
Meanwhile,Moody’s Investor Service has slashed its economic growth forecast for India to 2.5 per cent for calendar year 2020 (CY20) even as it expects the growth to bounce back to 5.8 per cent in 2021 (CY21). At the global level, it expects a GDP growth of negative 0.5 per cent in CY20, before bouncing back in CY21.
Most global central banks, including the U.S. Federal Reserve, have cut interest rates to battle the impact of the outbreak, while many have also resorted to printing money to prevent their economies from slipping towards recession.