RBI takes it forward from where FM Sitharaman left, announces 40 bps repo rate cut, loan freeze extension

The RBI Governor Shaktikanta Das announced a slew of measures aimed at further easing the liquidity conditions and providing relief to borrowers just a few days after the government concluded unveiling its five tranches of Rs 20 lakh crore worth of stimulus.

Staying true to what he had said earlier about calibrated intervention, the RBI Governor came out for the third time with a set of measures to alleviate distress in the economy. The interventions included announcements on policy rates with the Monetary Policy Committee holding an out-of-cycle review meeting and extension of previously announced relief measures for both industrial establishments and individual borrowers.

The RBI was expected to follow up with monetary-side interventions after the government announced fiscal measures to cushion the economy from the Covid impact.

Key Takeaways:

• Liquidity support: The RBI Governor Shaktikanta Das announced a 40 basis points repo rate cut. The MPC voted, with five of its six members in favour, for a reduction of repo rate by 40 basis points to 4 per cent from 4.4 per cent. Consequently, the reverse repo rate now stands at 3.35 per cent.
• Moratorium extended: A further three-month extension up to August 31, 2020 on the following:

1. Moratorium on term loan instalments
2. Deferment of interest on working capital
3. Easing of working capital financing requirements by reducing margins
4. Exemption from being considered as defaulter in supervisory reporting and reporting to credit information companies
5. Extension of resolution for stressed assets, asset classification standstill by excluding moratorium period of three months.

• Growth Outlook: On economic growth in the current fiscal, the RBI projected negative growth with a pick up in growth impulses in second half. However, these depend on the trajectory of the pandemic.
• Inflation Outlook: Headline inflation may fall below the RBI's medium term target of 4% in third or fourth quarter of the current fiscal.

• Demand & Supply:The governor said that the private consumption, which comprises 60 per cent of the GDP, has taken the biggest hit. Both the demand compression and supply disruption has taken a toll on the economy, the governor observed.
• Foreign trade: Line of credit of Rs 15,000 crore to EXIM Bank for 90-days with roll over of up to one year so as to enable it to avail US dollar swap facility.
• SIDBI: The special refinancing facility of Rs 15,000 cr to SIDBI at repo rate for 90 days for lending & refinance operations has been further rolled over for another 90 days at the end of initial 90 days period.
• States: The RBI eased the rules governing withdrawal from the Consolidated Sinking Fund resulting in release of additional Rs 13,300 crore to states. The RBI also increased the number of days states can be in continuous overdraft to 21 days from 14, and the number of days states can be in overdraft in a quarter has been raised from 32 to 50 days.