Covid 19 has not only caused panic in people and governmentsbut has made the global markets and economies turn upside down. Stock Marketshave drastically suffered. Volatility has risen. Panic-selling has left marketsshattered and clueless. India’s Sensex (Sensitivity Index) has fallen like apack of cards. It has seen the worst crash in decades. Similarly, economiesaround the globe have been falling and economists are worried that anotherrecession may be in the offing. Moody’s Investors Service, a top credit ratingand financial analysis organisation based in America, has cut the growth rateof India for the calendar year 2020 from 5.3 percent to 2.5 percent.
Amid such a chaos, RBI, the central regulatory authority ofthe Indian banking system, has declared COVID 19 a war and has unleashedmeasures to fight against it. It has made following courageous announcements:
(1) Repo rate cut by 75 basis points to 4.4 %
(2) Reverse repo rate cut by 90 basis points to 4 %
(3) Ease in MSF
(4) CRR reduced to 3%
(5) Moratorium of 3 months to Term Loans
(6) LTROs
Before we discuss all these policy cuts and announcements in plain language and see what they mean for the common masses, let’s quickly understand what Monetary Policy means—because the understanding of Monetary Policy will be needed to understand the practicality of these announcements and the challenges they pose.
Monetary Policy of a country includes those various tools with the help of which a country increases or decreases the flow and quantity of money. It deals with achieving a balance in an economy by arriving at a decision as to how much money should be present in the economy so that it remains in a balanced state and doesn’t suffer from imbalances like inflation which simply means the loss of purchasing power of money. The more the money, the lesser its power! It’s used along with another tool known as the Fiscal Policy which deals with taxes, etc.
Having said that, let’s try to analyse and understand the announcements made by RBI in the war against COVID 19.
Repo rate cut by 75 basis points to 4.4 %:
Repo rate is the rate at which RBI lends money to banks. Basis points refers to 100 parts of a percent. It means that Repo rate has now been reduced by 0.75 percent. What does it practically mean for the common man? It means that now banks will have to pay less towards RBI for borrowing money from it and therefore banks will be able to use that additional money in certain ways (ways benefiting general public in the current scenario). For example, this money may be used to pay off banks’ payables and giving some time to borrowers to pay instalments.
Reverse repo rate cut by 90 basis points to 4%:
Reverse Repo rate, as the name suggests, is the rate at which RBI borrows money from banks. Now when there is a lesser interest that banks would get if they park money with RBI, banks won’t do it and they would keep the surplus money and use somewhere else. This would prevent idle parking of money and would keep a window open through which banks may be motivated to help their customers in some ways.
Ease in MSF:
Marginal Standing Facility (MSF) means short-term borrowing or, what we call overnight borrowing, by banks from RBI. It’s the quick borrowing window of RBI available to banks for meeting immediate cash requirements. Banks usually avail of such borrowing facility against ‘government securities’. A ‘government security’ is a debt instrument or a kind of investment backed by government with a promise of repayment at the time of its maturity. Now, RBI has increased MSF to 3 % from 2 % of SLR (Statutory Liquidity Ratio) which means the mandatory holding of liquid assets viz gold and cash by banks. This means an increase of 100 basis points till June 2020. This would mean that banks will be in a better position to make use of this facility and consequently make more money available for the welfare of the people.
CRR reduced to 3 %:
Monetary Policy Committee (MPC) also announced slashing Cash Reserve Ration (CRR). It has decided that CRR will be reduced by 1 percent and brought down from 4% to 3%. It is a massive cut. CRR means the amount of reserves that a bank has to mandatorily keep with the RBI. This massive reduction would mean that now banks will have to keep a smaller amount of its reserves with the central bank. This, in turn, may be used by banks to make more funds available in the economy and for the people.
Moratorium of 3 months to Term Loans:
This is something that everybody is going to relate to. It directly concerns and relates with the common man. Now, banks would extend a moratorium of three months for the payment of term loan instalments. A moratorium means a holiday period, i.e, borrowers do not have to pay their EMIs (Equated Monthly Instalments) for three months; they can pay later. No penalty would be levied on such a late payment. To put it in simpler terms, if you’ve borrowed money for a car from your banker, you can pay its instalment after three months and not now. That is not all; there is another breather; usually what happens is that if a borrower misses an instalment or two, it gets recorded in his or her credit history and his or her credit score gets low—credit history of an individual is continuously updated by approved agencies who then give everyone a score. With this policy announcement, it has been decided that such a delayed payment won’t disturb the credit score of a borrower. However, such a relaxation is not available, apparently, for those who enjoy running credit limit facilities, commonly called CC limit. This would, however, be a sigh of relief for those who do not have a regular income flow due to the lockdown, for example the self-employed. It’s, however, advised to pay instalments if one doesn’t have a problem.
LTROs:
Long term Repo Operations (LTROs) have been introduced by RBI. This consists of some term repos of tenures of a year or three. These are tools to infuse more money into the system. Some economists have termed it a ‘masterstroke’. This is going to inject an amount of Rs One Lakh Crores into the system.
Postscript:
If you’re still clueless about the benefits and impact of such policy changes, let us have a look on these figures. Through the LTROs, a total of Rs 1 lakh crore will be injected into the system; through the change in CRR, Rs 1.37 lakh crores will be infused and the ease in MSF would blow in an amount of another Rs 1.37 lakh crores into the economy. That means a total of Rs 3.74 lakh crores will be ideally injected into the economic stream with the help of such apparently minuscule percentage changes. It would be worth knowing that this is the steepest change in rates in eleven years.
However, no macroeconomic policy decision comes withoutchallenges. It would be tricky. Those at the helm of the affairs have kepttheir fingers crossed. It would be interesting to watch how the economy behavestowards these policy changes. There are a few challenges that would be hard todeal with. One, such an accommodative and marginally expansionary stance islikely to result into inflation. There will be more money and more money maylead to the weakening of its purchasing power. Second, it has been seen thatbanks don’t always pass on such benefits to public. This was seen when MCLR wasbrought into effect. That would be interesting to watch. However, given theurgency of the matter, at the time of such a lethal pandemic, RBI has done whatit could do and it has done it impressively. It is indeed a brave policychange.
(Author works for a PSU bank. Views are personal and not of the organisation he works for.)