RBI cuts rates by 40 bps; maintains accommodative stance

The RBI held an unscheduled Monetary Policy Committee meeting to undertake a set of measures to infuse liquidity into the system reeling under the economic impact of the lockdown.

[You may also read: The Monetary Policy Committee explained]

On 22nd May, the RBI Governor, Shaktikantha Das, addressed the nation. It was his third address since the first phase of the lockdown induced to contain the coronavirus pandemic began on 25th March.

[You may also read: Repo, CRR, SLR, MSF, Bank rate, OMO and MSS explained]

The measures taken by the MPC in this meeting are:

  • Cut in the repo rate: The RBI slashed repo rate by 40 basis points; from 4.4 % to 4 %. This will further reduce the cost of borrowings for banks. On 27th March, the RBI had cut the repo rate by a massive 75 basis points. [You may read: RBI cuts rates to mitigate COVID-19 impact]
  • Cut in the reverse repo rate: The RBI slashed reverse repo rate by 40 basis points; from 3.75 % to 3.35 %. Since 27th March, this rate has been cut by a total of 115 basis points to encourage banks to lend more, instead of parking excess funds with the RBI. [You may read: RBI cuts reverse repo to mitigate COVID-19 impact]
  • Extended moratorium on term loans: On 27th March, banks and NBFCs were allowed to give borrowers a 3-month moratorium on repayment of installments of all term loans outstanding as of March 1, 2020. This moratorium has been further extended by 3 months.
  • Deferment of interest rate on Working capital loans: The RBI had also deferred interest payment on working capital loans by 3 months. The accumulated interest would have been paid after the expiry of 3 months. This deferment has been further extended by 3 months
  • Additionally, it has been decided to permit banks and NBFCs to convert the accumulated interest on working capital facilities over the total deferment period of 6 months (i.e. March 1, 2020, up to August 31, 2020) into a funded interest term loan. The loan shall be fully repaid by March 31, 2021.
  • Increased bank exposure to corporate groups: A bank’s exposure to a group of connected companies was capped at 25% of its core capital. Now it has been increased to 30 %. Therefore, a bank can now lend a larger amount to a corporate group. [You may also read: PMC Bank Scam: Everything you wanted to know]
  • Extension of export credit period: Export credit scheme was introduced by the RBI in 1967 to make working capital finance available to exporters. Pre-shipment credit is any loan or advance granted to an exporter for the financing of expenses prior to shipment of his goods. This credit is given on the basis of any evidence of an order for export. The evidence could be a letter of credit in favour of the exporter provided by the overseas buyer. ‘Post-shipment Credit’ is any loan or advance granted to an exporter after goods/ services have been shipped. This pre- and post-shipment credit period has been extended to 15 months from 12 months.
  • Extension of the time period for completion of outward remittances/ payments against imports: It has been decided to extend the time period for completion of outward remittances (payments) against imports (i.e. excluding import of gold/diamonds and precious stones/jewellery) into India from six months to twelve months. This extension has been done for shipments until July 31, 2020. The purpose of the extension is to provide greater flexibility to importers in managing their operating cycles in a COVID-19 environment,
  • Line of credit to Export-Import (EXIM) Bank: The EXIM bank is dependent on foreign currency borrowings for funds. COVID-19 has made it difficult to borrow. The RBI decided to extend a line of credit of Rs.15000 crore to the EXIM bank for a period of 90 days with rollover up to a maximum period of one year. (line of credit means the amount up to a limit of Rs.15000 can be borrowed as and when required. The repayment has to be done within 90 days). RBI provided this facility to EXIM bank to enable it to avail of a US dollar swap facility to meet its foreign exchange requirements. [You may read: What is swap facility?]
  • Refinance facility to SIDBI: The RBI had announced a special refinance facility Rs. Rs.15,000 crore to SIDBI at RBI’s policy repo rate for a period of 90 days for on-lending/refinancing. In order to provide greater flexibility to SIDBI, it has been decided to roll over the facility for another 90 days.
  • Relaxation of Voluntary Retention Route (VRR) scheme: VRR enables Foreign Portfolio Investors (FPIs) to invest in debt market in India with lesser restrictions. Investments through the VRR are free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets provided FPIs voluntarily commit to retaining a required minimum percentage of their investments in India for a period. Also, 75 % of allotted limits to an FPI have to be invested within 3 months. It has been decided that an additional three months’ time will be allowed to FPIs to fulfill this requirement. [You may also read: Types of Foreign Investment Decoded- FDI, FII, FPI and QFI]
  • Relaxation of withdrawal limits for states from CSF: It has been decided to relax the rules governing withdrawal from the CSF. Consolidated sinking funds (CSF) is the reserves kept by states with the RBI. Under the CSF scheme, a state government could contribute 1-3% of its annual outstanding debt liabilities to the fund to create a buffer for repayment of their future liabilities.  The states that will benefit the most are those which have managed to keep large amounts in the CSF reserves, namely Maharashtra, Gujarat, Odisha, West Bengal, Andhra Pradesh, Bihar and Tamil Nadu. Together with the normally permissible withdrawal, this measure will enable the states to meet about 45 % of the redemptions of their market borrowings, due in 2020-21.

To conclude, the RBI has maintained the ‘accommodative stance’ implying that it is willing to cut rates whenever required to boost growth in the economy. It expects the economy to contract in the first half of the fiscal year 2020-21 and stated that the inflation outlook remains uncertain.

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References- RBI website

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