Reserve Bank of India, in its recent announcements on May 22, 2020, has brought out many measures to boost the economy and infusing more funds in the system. The Apex Bank reduced Repo Rate, Reverse Repo rate, Bank Rate and MSF rate each by 40 basis points. These measures aim to easing of interest rates, enhancing liquidity & granting regulatory relaxation to provide extraordinary support to Economy & Markets. Since negative impacts of the pandemic on the economy cannot be ruled out and GDP of the country is likely to come down sharply, the Capital markets are already worst hit and apart from all these there exist a deflation risk, so these measures were much required for revival of the economy.
The Key points of the policy are as under:-
Repo Rate – reduced by 40 bps to 4.00% with immediate effect
Reverse Repo Rate – reduced by 40 bps to 3.35%
Bank Rate & MSF Rate – reduced by 40 bps to 4.25%
Moratorium on Term Loans – moratorium of 3 months on payment of instalments in respect of all term loans now been extended to 6 months i.e. till 31st August 2020
Group exposure limit of banks increased from 25% to 30% of eligible capital base.
Abovesaid changes in the policy are likely to impact the different segments of the society in the following ways:-
Huge Liquidity: Easing of Repo Rate, Reverse Repo Rate, Bank Rate and MSF Rate shall increase a liquidity of about 7.50 lakh crore.
Bank and NBFCs stress to be eased: NBFCs and Banks are likely to be worst hit by the COVID-19 effects, since most of the borrowal accounts running with them would be making default in repayment of instalments and servicing of interest in the working capital accounts, so keeping in view the same, Moratorium period of the term loans has been further extended for a period of 3 months i.e. upto 31st August, 2020 from 31st May, 2020.
To Reduce Income of Pensioners: The pensioners whose livelihood normally depends upon the Interest rates are likely to be effected badly, since these measures would result in lowering of Deposit Interest Rates by the Banks. They may have to go for alternative channels of investments.
After Effects of COVID-19: COVID-19 is likely to hit the economy badly in the short run as explained above. However, oncethe peak of the virus is over, we are likely to see improvement in growth. Medium term impact of COVID-19 on economy will not be substantial. We expect a good cumulative growth for the next 3-4 years.
Although this Monetary Policy is much accommodative, yet further easing by the Reserve Bank of India in its coming policies cannot be ruled out.
Sanjeev Kumar Khanna (Financial Mentor)
