Context:

RBI has announced a slew of measures to boost the economy towards recovery.

The RBI address comes a day after Prime Minister Modi met Finance Minister to discuss the economic situation in the country following the prolonged lockdown due to the coronavirus pandemic.

The announcements made by the Reserve Bank will help in infusing liquidity and facilitating bank credit flow to traders and industry at a time when both are battling the lockdown due to coronavirus outbreak, according to exporters.

Trade Promotion Council of India (TPCI) Chairman said that steps announced by RBI will help in to infuse liquidity, facilitate bank credit flow and ease financial stress will surely help industry and economy fight this deadly pandemic.

RBI recent second phase of measures:

1. A 25 basis point reverse repo cut, TLTRO (Targeted Long Term Refinancing Options) of Rs 50,000 targeted at NBFCs;
2. Relaxation of asset classification norms;
3. More funds for states – the RBI has increased the limit under Ways and Means Advances for states to avail short term funds to 60 per cent of the existing limit.
4. A special refinance facility of Rs 50,000 crores was announced to meet sectoral credit requirements – this is to specifically boost liquidity of financial institutions like NABARD, SIDBI and National Housing Bank.
5. NPA (Non-performing Assets) norms of 90 days have been relaxed. The period of moratorium will be excluded from the 90-day classification norms of NPAs for those accounts, which would avail the moratorium facility. The NBFCs (Non-Banking Financial Companies) have been given flexibility to give such relief to their borrowers.

Financial institutions continue to be wary of lending-businesses across sectors have complained that even as the RBI has brought down lending rates and has been urging banks to lend, their experience with lending institutions continues to be difficult.

Highlights from the RBI Governor’s address to the media:

• RBI monitoring situation developing out of Covid-19 outbreak

• The mission is to do whatever it takes to prevent the epidemiological curve from steepening further

• IMF projection of 1.9% GDP growth for India is highest in G20

• IMF expects Indian economy to post sharp turnaround in 2021-22

• Impact of Covid-19 not captured in IIP data for February

• Contraction in exports in March at 34.6% much more severe than global financial crisis of 2008-09

• LTRO-2.0 to involve Rs 50,000 crore to begin with

RBI measures will expand bank credit, boost liquidity: NITI Aayog

1. Viewed by the NITI Aayog vice chairman, RBI measures will revive credit flow by commercial banks and targeted long-term repo operation (LTRO) would further activate the corporate bond market and also provide much needed liquidity to NBFCs.
2. The targeted LTRO will further activate the corporate bond market and also provide much needed liquidity to NBFCs.
3. The government true to his word on doing what it takes to address the crisis brought on by the coronavirus pandemic.
4. LTRO is a tool which central bank uses to offer money to banks for a period of one to three years at the prevailing repo rate.
5. The banks in turn offer government securities with same or higher tenure as a collateral to the central bank.
6. The NITI Aayog vice chairman also pointed out that forward guidance by the government and RBI indicates a softening inflationary outlook that will provide needed space for monetary policy to act in case further action is needed to bring the economy back on track.
7. Accurate assessment of conditions and immediate prognosis by RBI. Right-sized help to pain points and will help improve liquidity in economy.

Infuse liquidity will mitigate financial stress: Formal sector:

Describing the new RBI measures as a “life-saving dose” for millions of businesses, Assocham said the partial re-opening of the lockdown, further regulatory forbearances, infusion of additional liquidity and nudging banks to do real lending would provide a much-needed shield both to Corporate India as also the most vulnerable informal sectors of the economy against the coronavirus onslaught.

Relief measures unveiled by the RBI should help NBFCs, housing finance companies, small businesses and above all considerably avert the risk of further NPAs.

The allotment of Rs 10,000 crore to the National Housing Bank is a big move for the real estate sector reeling under the liquidity crisis. It will help provide capital to the Housing Finance Corporations and eventually provide major relief to developers battling liquidity issues during Covid -19 pandemic.

Ways and Means Advances for States:

On April 1, 2020 the RBI had announced an increase in the ways and means advances (WMA) limit of states by 30 per cent.

It has now been decided to increase the WMA limit of states by 60 per cent over and above the level as on March 31, 2020 to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts, and to plan their market borrowing programmes better. The increased limit will be available till September 30, 2020.

Recent experience suggests that a financial restructuring package without insistence on structural reforms leads to temporary alleviation of the problem in the sector followed by eventual recurrence of the core problems of liquidity.

We therefore propose that the post COVID-era is the right time to undertake an ambitious overhaul of the major sectors in the economy.

Conclusion:

Recent developments relating to inflation and the outlook without infringing in any way on the mandate of the monetary policy committee (MPC).

The RBI will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic.

The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable.

Regulatory measures that have been announced so far – including those made today – are dovetailed into the objective of preserving financial stability. Although social distancing separates us, we stand united and resolute. Eventually, we shall cure; and we shall endure.