Prelims cum Mains

In 8th straight cut, RBI slashes key rate 40 basis pts to new all-time low

 #MPC | #Repo Rate | #EXIM Banks |    

In News

      • The Monetary Policy Committee (MPC) of the RBI has reduced its key policy rates to stabilize the financial system and deal with the negative economic impact of the ongoing nationwide lockdown.
      • In doing so, the RBI panel unexpectedly cut the repo rate by 40 basis points to 4 per cent.
      • Consequently, the Marginal Standing Facility (MSF) rate and the bank rate have reduced to 4.25% from 4.65% and the reverse repo rate has reduced to 3.35% from 3.75%.
      • The RBI has cut the repo rate by a total of 115 bps since the lockdown began in late March. It also marks the eighth straight rate cut by the RBI.

 

Reasons for the rate cut

      • The MPC, believes that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing significant stress.
      • The impact of the shock has increased significantly by the interaction of supply disruptions and demand reduction.
      • Moreover, beyond the destruction of economic and financial activity, livelihood and health of people has also been severely affected.

 

Impact of rate cut

      • The rate cut will immediately result in retail loans becoming cheaper for borrowers whose EMIs are linked to the repo rate. These include home loans and other retail loans viz auto and personal loans.
      • The marginal cost of lending rate (the benchmark for loans to corporates) of all banks will get revised next month based on a formula.
      • Interest rates on deposits are set to come down further due to the increase in banks deposits and the fall in credit demand.
      • Further, the 40 bps cut in reverse repo rate — the interest rate that the RBI offers to banks for funds parked with the central bank — will prompt banks to make available funds for the productive sectors of the economy.
      • This will help in correcting an imbalance wherein banks have been parking close to Rs 7-8 lakh crore at the RBI’s reverse repo window instead of lending these funds.

 

Extension of moratorium (delay in payment) on loans

      • The RBI has allowed lenders to extend an ongoing moratorium on loan repayment, which was due to end on May 31, by another three months to August 31.
      • All borrowers, including home loan, term loans and credit card outstanding, will get the benefit of the moratorium.
      • This will help borrowers, especially corporates which have halted production and are facing cash flow problems, to get more time to stabilize their operations and restart their units.
      • Furthermore, the RBI has allowed borrowers and banks to convert the interest charges during the moratorium period (from March 1 to August 31) into a term loan which can be repaid by March 2021. This is expected to reduce the burden on borrowers who have gone for a moratorium.

 

Increased exposure limit of Banks

      • Due to the COVID-19 pandemic, debt markets and other capital market segments are witnessing increased uncertainty. As a result, many corporates are finding it difficult to raise funds from the capital market and are predominantly dependent on funding from banks.
      • Thus, to facilitate the flow of funds to corporates, RBI has decided to increase a bank’s exposure to a group of connected companies from 25 per cent to 30 per cent of the eligible capital base of the bank.
      • Under the existing guidelines on the Large Exposures Framework, the exposure of a bank to a group of connected counter-parties should not be higher than 25 per cent of the lender’s eligible capital base at all times.
      • The increased limit will be applicable up to June 30, 2021 and is expected to help banks meet the borrowing requirements of the private sector.

 

Extension in remittance timeline

      • Due to the Covid-19 related disruptions in cross-border trade, there has been a slowdown in manufacturing and sale of finished products and a delay in the payment, both domestically and overseas.
      • This has led to an increase in the length of the operating cycle for business entities.
      • Thus, the central bank has decided to extend the time period for completion of remittances against normal imports into India from 6 months to 12 months from the date of shipment for such imports made on or before July 31, 2020.
      • However, the above extension will not be applicable in cases where amounts are withheld due to guarantee of performance.
      • The measure will help in providing greater flexibility to importers in managing their operating cycles in a COVID-19 environment.

 

Credit line for Exim Bank

      • As Exim Bank predominantly relies on foreign currency resources raised from international financial markets for its operations, it is facing challenges to raise funds in international debt capital markets.
      • Thus, the RBI has decided to extend a line of credit of Rs 15,000 crore to the Export-Import Bank of India (Exim Bank) for a period of 90 days, with rollover up to a maximum period of one year.
      • This will enable the Exim Bank to avail a US dollar swap facility to meet its foreign exchange requirements.

 

Unmet market expectations

      • The corporate and the banking sector had made suggestions to the RBI, to provide a one-time restructuring of loans as a relief measure to deal with the slowdown, however, the RBI announcement did not provide relief on this front.
      • Further, there is no indication on the bad bank proposal suggested by the Indian Banks Association (IBA) to tackle bad loans.
      • Also, the RBI was silent on easing of bad loan recognition norm from 90 days to 180 days.
      • Non-banking finance companies were expecting a permission from the RBI for direct infusion of funds from banks, instead of banks investing in the debt securities of NBFCs, which has not been provided.

 

Future Outlook

      • As per the MPC, economic activity other than agriculture is likely to remain depressed in Q1 of 2020-21 due to the extended lockdown.
      • Even though the lockdown may be lifted by end May with some restrictions, economic activity even in Q2 may remain subdued (low) due to social distancing measures and the temporary shortage of labour.
      • Recovery in economic activity is expected to begin in Q3 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives.
      • Although, the RBI did not mention any specific figure on the growth rate, it expects the growth to be in the negative territory in 2020-21.
      • Given the limited data from the National Statistical Office, the RBI could not forecast the inflation numbers, but it expects prices to increase in the first half due to supply-side issues and decrease in the second half of the year.
      • The RBI has however assured that it will continue to monitor the situation and use all its instruments, along with coming up with new ones to address the future uncertainty.

 

       
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Wish you a very Good luck 🤞

 

 

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