Struggling economy gets RBI's boost, big announcement for banks
What's the story
With the economy stung drastically by the coronavirus pandemic, RBI Governor Shaktikanta Das addressed media for the second time in a month to announce key measures. The apex bank cut its reverse repo rate by 25 basis points, bringing it to 3.75%. This move will push banks to make use of the excess funds towards lending. Here's more on the key announcements.
Repo rates
Reverse repo rate changed for second time in a month
The reverse repo rate is the rate at which RBI borrows money from banks. As the rates are slashed, banks can now lend more money to various sectors, which will help churn the wheels of the economy. Just last month, RBI brought down repo rate (the rate at which the apex bank lends money to banks) from 5.15% to 4.4%.
Lockdown
A 40-day lockdown has brought economy to halt
Das said RBI is closely monitoring the situation in the country and has been taking proactive decisions. To note, India's nationwide lockdown will end on May 3, an extension of nineteen days from the earlier end date of April 14. The restrictions have brought the economy to a halt, with most sectors running out of capital. Industry bodies want financial aid.
Measures
Norms for NPAs were relaxed too
Some other measures were also announced to provide more liquidity to non-banking finance companies (NBFCs). The RBI also relaxed norms pertaining to the labeling of non-performing assets (NPAs). RBI said the 90-day NPA norm will exclude the moratorium period for accounts for which lending companies have decided to extend moratorium or deferment, or which were standard on March 1, 2020.
Details
NBFCs were given relief like commercial banks
Das said the three-month moratorium period, which commercial banks have extended, will also be applicable on loans that NBFCs give to real estate companies. RBI spiked WMA (ways and means advance limits) of states by 60% (over and above) to allow them to get more aggressive in dealing with COVID-19. On April 1, the WMA limit of states was increased by 30%.
Details
Automobile sector suffered, so did exports
Das spoke for some 30 minutes where he noted that automobile production and sales have dipped sharply in the month of March. There was also a fall in electricity demand, he added. Exports suffered by 34.6%, which is far greater than what happened during the recession of 2008-09. He underscored that damage to industries was not calculated in the Index of Industrial Production (IIP) data.
Points
Banking operations haven't been hit
The Governor said banking operations have largely remained the same as customers are taking to internet banking. Further, he announced, "Banks will not make any further dividend payout in view of financial difficulties arising from COVID-19." He added that CPI inflation declined in March and is likely to follow a downward trajectory. It fell 170 bps from its January 2020 peak, Das underlined.
Growth
India's growth will post a turnaround in next fiscal year
Das noted that India's growth in the current fiscal year will remain at 1.9% but predicted a massive turnaround in the fiscal year 2021-22. "India is expected to post a sharp turnaround and resume its pre-COVID growth trajectory by growing at 7.4% in 2021-22," he said, adding that the International Monetary Fund has painted the best picture of India among G20 countries.
Reactions
PM Modi said steps will improve credit supply
Soon after Das made the big announcements, Prime Minister Narendra Modi said these steps will improve credit supply and enhance liquidity. "These steps would help our small businesses, MSMEs (micro, small and medium enterprises), farmers and the poor. It will also help all states by increasing WMA (a credit policy to provide state governments with cash flow issues)," he tweeted.