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On May 22, 2020, the Reserve Bank of India (RBI) at the Mumbai headquarters, announced some key interest rates cut to revive the shirking GDP growth, caused due to the COVID-19 and also because of the earlier Government of India’s (GoI) domestic policy decisions. In announcing the cuts in the key interest rates of the central bank, it showed an accommodative stance.
The RBI’s Monetary Policy Committee (MPC) in its meeting, held during May 20-22, 2020, has decided to reduce the key interest rates to revive the shrinking growth of GDP and to mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target of 4% +/- 2%.
On the basis of both the global and the Indian economy, the MPC members, consisting of 6 officials: Dr Pami Dua, Dr Ravindra H. Dholakia, Dr Janak Raj, Dr Michael Debabrata Patra, Shri Shaktikanta Das and Dr Chetan Ghate, have taken a routine practice of voting, in order to come to a conclusion of making a majority policy decision.
Through voting, the five members have decided to reduce the Policy Repo Rate by 40 bps and one official Dr Chetan Ghate, however, voted for a reduction of 25 Basis Points (BPS). And finally, a reduction of 40 bps has been agreed in order to revive the present economy from the clutches of COVID-19. On the basis of that vote, the Central Bank has announced some major policy decisions as stated below:
Reduce the Policy Repo Rate (is the rate at which the RBI lends funds to commercial banks by purchasing securities) under the Liquidity Adjustment Facility (LAF) by 40 Basis Points (BPS), i.e.., from 4.40% to 4.0% with immediate effect
Reduce the Marginal Standing Facility (MSF) Rate (a window for banks to borrow from the RBI in an emergency situation when inter-bank liquidity dries up completely) and the Bank Rate (is the lending rate at which commercial banks can borrow from the RBI without providing any security) from 4.65% to 4.25% and
Reduce the Reserve Repo Rate (Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country) under the LAF from 3.75% to 3.35%.
MPC’s Two Key Policy Decision Charts
Chart: Repo Rate During 2010-2020
Chart: Reserve Repo Rate During 2010-2020
The Assessments Of Global And Indian Economy
The MPC’s overall assessment statement comes from the standstill position of global economic activities due to the COVID-19 and from the worsening economic activities due to the lockdowns and social distancing policies in place. In further detail, it explained the global and domestic economic scenarios as follows:
The growth during Q1: 2020 in the key Advanced Economies (AE) like the USA, Euro Area, Japan and the UK has contracted
Both investment activity and private consumption suffered due to collapse in the capital goods production and the large retrenchment in the output of consumer durables and non-durables
High-frequency indicators of service sector activities like passenger and commercial vehicle sales, domestic air passenger traffic and foreign tourist arrivals experienced sizable contractions
In the external sector, India’s merchandise trade slumped in April 2020, with exports shrinking by 60.3% and imports by 58.6% (y-o-y), respectively.
Imports contracted in all 30 commodity groups in April and while in exports contracted to 28 out of 30 commodity groups.
On the financing side, net foreign direct investment inflows picked up in March 2020 to US$ 2.9 billion from US$ 0.8 billion a year ago. In 2020-21 so far (till May 18), net foreign portfolio investment (FPI) in equities increased to US$ 1.2 billion from US$ 0.8 billion a year ago. In the debt segment, however, there were portfolio outflows of US$ 3.8 billion during the same period as compared with outflows of US$ 1.4 billion a year ago.
Official Address Of The 25th RBI Governor, Mr Shaktikanta Das, To The Public
In its outlook, the MPC observed that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated. And stressed that the various sectors of the economy are experiencing acute stress with the impact of the shock that has been compounded by the interaction of supply disruptions and demand compression. The observations made in the statement are as follows:
Among the pressure points, the elevated level of pulses inflation is worrisome and warrants timely and swift supply management interventions, including – (i). A reappraisal of import duties and (ii). Step-up of open market sales/PDS-offtake by the FCI to offload some part of excess stocks can cool down cereal prices and also create room for rabi procurement
Due to extended lockdown, the Q1: 2020-2021 economic activity remains depressed
Even in Q2, the economic activity may witness subdued due to social distancing measures in place and shortage of labour due to the migrant crisis
Recovery of economic activities may slightly be a witness in Q3 and gain momentum only in Q4 as supply lines are restored gradually and thereafter demand rives
Stresses that, beyond the destruction of economic and financial activity, livelihood and health are severely affected.
Indian Economy In A ‘Negative Territory’
In analyzing the growth outlook of the economy, the MPC has judged that the risks to be gravest with most uncertainties. It says that even if all the favourable conditions, like the combination of fiscal, monetary and administrative measures are taken into consideration by the RBI, it is evident that the GDP growth in 2020-2021 is estimated to remain in ‘negative territory’.
It expected some clarity on the future course from the end May 2020 release of NSO’s statistical information on the national income.
Way Forward: Through Developmental And Regulatory Policies
MPC’s statement set out various developmental and regulatory policy measures in order to improve national growth and its intended effects. Proposed 4 policy measures as follows,
Measures to Improve the Functioning of Markets: Refinancing Facility for Small Industries Development Bank of India (SIDBI) announced a special refinance facility of ₹15,000 crores to SIDBI for on-lending/refinancing. Investments by Foreign Portfolio Investors (FPI) under the Voluntary Retention Route (VRR) – Provided an additional three months time to fulfil the requirement of investment limit
Measures to Support Exports and Imports: (i). Export Credit – Increased the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing 1 year to 15 months, on/before July 31, 2020. (ii). Liquidity Facility for Exim Bank of India – Extended a line of credit of ₹15,000 crores to the EXIM Bank. (iii). Extension of Time for Payment for Imports – Extended the timer period from 6 months to 12 months on/before July 31, 2020
Measures to Ease Financial Stress: (i). Moratorium on Term Loan Installments – Extended the moratorium on term loan instalments by another 3 months, i.e., from June 1, 2020, to August 31, 2020. (ii). Deferment of Interest on Working Capital Facilities – Permitted deferment of interest for another three months, from June 1, 2020, to August 31, 2020. (iii). Payment of Interest on Working Capital Facilities for the Deferment Period – Permitted to convert the accumulated interest into a funded interest term loan which shall be repayable not later than the end of the current financial year (i.e., March 31, 2021). (iv). Asset Classification. (v). Easing of Working Capital Financing. (vi). Extension of Resolution Timeline and (vii). Limit on Group Exposures under the Large Exposures Framework
Debt Management: Consolidated Sinking Fund (CSF) of State Governments – Relaxation of Guidelines
In concluding the statement, the RBI says that “in response to COVID-19, the requirement of fiscal resources has increased with likely implications for market conditions going forward. The RBI shall remain watchful and support the smooth completion of the borrowing programme of the Centre and States in the least disruptive manner.”
Further informed that the minutes of the MPC’s meeting will be published by June 5, 2020.
Note: This article is based on the information retrieved from the official website of RBI. You may access it over here.