RBI taking steps to revive economy enshrine positive economic outlook though experts’ expectations for lending rates cuts have not crystallized.
Revival measures without rate changes
- In wake of RBI taking steps to revive economy, expectations were there that RBI may issue other policies, such as restructuring of loans, cut in repo rate by 25 basis points, etc.
- The opinions are made on the rate cuts while experts think loan restructuring is extremely vital at this pandemic time. RBI taking steps to revive economy become all more significant on account of India’s economic outlook vis-à-vis coronavirus caused economic disruptions.
- Rahul Bajoria an economist at Barclays days back told, “High inflation has created confusion to the Reserve Bank’s policy opinion, but with respect to aggregate demand, we predict the RBI will proceed with easing, also a 25-bps cut.
- The RBI Governor’s statement made on 6th August, 2020, surprisingly, announced no rate changes but expressed that in Monetary Policy Committee’s (MPC) assessment, “economic activity had started to recover from the lows of April-May; however, the surges of fresh infections have forced re-clamping of lockdowns in several cities and states. Consequently, several high frequency indicators have levelled off.”
- The Finance Ministry was vigorously engrossed with the RBI decision. Moreover, the central bank was anticipated to grant directions respecting the loan moratorium which is coming to an end on August 31st amid bankers contradicting the further extension of this facility on concerns over its misuse.
Liquidity facility channelizing growth
- Annual retail inflation rose in June to 6.09% from 5.84% in March, remaining above the RBI’s medium-term target range of 2%-6%.
- Considering this, though no rate changes have been announced by RBI in its 6th August Statement, but additional special liquidity facility of ₹10,000 crore is provided at the policy repo rate consisting of Rs. 5,000 crore to the NHB to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through HFCs; and Rs. 5,000 crore to the NABARD to ameliorate the stress being faced by smaller NBFCs and micro-finance institutions in obtaining access to liquidity.
- The RBI’s fresh policies have concentrated on financial stability and the growth despite the price target. In its policy announcements made on 6th August, 2020, RBI stated that stressed MSME borrowers will be made eligible for restructuring their debt provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021.
- The Central Bank also introduced an automated mechanism in e-Kuber system to provide banks more flexibility/discretion in managing their liquidity and maintenance of cash reserve requirements.
- A scheme of retail payments in offline mode using cards and mobile devices, and a system of on online dispute resolution (ODR) mechanism for digital payments will also be introduced, RBI announced.
RBI’s measures undoubtedly ushered sentiments of confidence among all the stakeholders in the challenging times as economy ‘unlocks’ itself gradually.