It is commendable that fiscal and monetary policy have moved with swift, simultaneity to battle the threat posed by Covid19. The Finance Minister on 26th March announced a slew of measures, a safety net for the poor, the dispossessed and to ameliorate the sufferings of those at the margins of society and on 27th preponed its scheduled MPC meetings for 1st to 3rd April to 24th to 26th April RBI moved in tandem and announced wide ranging Monetary measures. At this critical juncture, the nation needs such joint actions.
Finance Minister in her Rs 1.7 lakh package announced a Rs 20,00 to 8.7 crore farmers, direct cash transfer for farmers, within ten days1000 crore transfer for widows and the physically handicapped 50 lakh crores for health workers our embattled trench warriors,500to be transferred directly into Ja 20 crore Jan Dhan accounts of women and the Government to shoulder the burden of EPF payments for those earning less than fifteen thousand20 lakh collateral free loans to women SHGs and many other measures.
The RBI addressed the concerns of middle class India, Corporate and Financial Institutions in its Monetary Policy announcement.
The first step was to make Capital cheaper, the REPO rate was brought down 75 basis points to 4.40 % from 5.15% with immediate effect. To discourage Banks from Lazy Banking, parking funds with RBI and to prod them to lend to the real economy. The reverse repo rate has therefore been reduced to 4%.The marginal standing facility rate and the Bank rate reduced to 4.65% from 5.40%. The cash reserve ratio reduced ,across the Board to 3% and the daily maintenance of CRR as a percentage of Banks net demand and time liabilities to 80% from 90%. The Targeted long term Repo operations upto 3 years for 1,00,000 crore at a floating rate linked to the policy repo rate .Liquidity under the scheme to be deployed in Investment grade corporate bonds, commercial paper and debentures over and above the outstanding level of investments in these bonds as on March 2020.This is to create some orderliness in the bond markets ,the yields have risen ,liquidity headwinds have led to redemption pressures and liquidity premia on corporate bonds, debentures and commercial paper. This measure is expected to bring liquidity to the Bond market
The RBI objective is an expansion of sizeable liquidity in the system to ensure orderly functioning of financial markets and institutions, in the wake of disruptions caused by volatility in the global markets due to uncertainties arising from Covid-19 Pandemic.
The second set of measures relate to moratorium on term loans, outstanding as on 1st March 2020 .the repayment schedule and all subsequent due dates ,as also the tenor of such loans may be shifted across the board by three months .This is applicable to all commercial banks inclusive of Regional Rural Banks, Small Finance Banks ,Local Area Banks,Cooperative Banks, All India Financial Institutions and NBFCs including Housing Finance Companies and Micro Finance Institutions. Interest will also be deferred and the accumulated interest for the period will be paid after the expiry of the deferment period. The moratorium on instalments and deferment on interest on all term loans of retail and corporate to enable the borrowers to tide over the issues, especially for small businesses ,including loss of regular cash flow, livelihood as a result of the pandemic. This includes credit card outstanding and should come as a huge relief to the middle class and to younger people who often use credit cards. This restructuring of loans, will not be taken as a reclassification of loans by banks and the credit information companies cannot use it to alter or adversely impact the credit histories of the borrowers. Where working capital facilities are sanctioned in the form of cash credit/overdraft, lending institutions can allow deferment of three months its the caveat of payment of interest in respect of all such facilities outstanding as on 1st March ,2020. To ease working capital financing drawing power under cash credit/overdraft facilities may be recalculated by reducing margins and by reassessing the working capital cycle of the borrowers .These concessions are enabled to allow borrowers to cope with a sudden black swan event and have not arisen due to the borrowers financial stringency thus they will not lead to any asset classification down grade. The MSMEs and small businesses will be helped by easing of working capital finance and deferment of interest on working capital facilities. .Ample liquidity will help to narrow the credit spread of borrowers.
More importantly the RBI and the Government have signalled strongly that they are in step and will not hesitate to take further measures required to battle the pandemic. So keep calm and carry on.
Yes, the fundamentals of our Economy are sound, we have a demographic advantage in a young capable educated workforce, a young working age population where the rest of the world is graying, we have the financial muscle of a strong banking systems of ratchet up the trajectory of economic growth we have strength and resilience on our side. We have strong leadership there is no reason for despair we will bounce back.
Dr. Deepali Pant Joshi, former ED of RBI and an Independent Director in MCX (Multi Commodity Exchange of India)