The Central Bank Relief Package

Tough times never last; only tough people and tough institutions do.

Source: Tavaga Research

In the wake of the Covid-19 pandemic, the monetary policy committee (MPC) decided to advance its meeting to evaluate the macroeconomic situation and mull on a relief package to weather the disruption.

The RBI Governor Shaktikanta Das shared the decisions of the MPC in a press conference on the 27th March. The governor mentioned that this is an “extraordinary and unprecedented situation”. Das mentioned everything will hinge on the depth of the Covid-19 outbreak, its spread, and its duration. 

The monetary relief measures announced by Das were three-pronged. They hinge on:-

1. Infusing liquidity in the economy
2. Ensuring the benefits trickle down to the end-user, ie. the citizens like us to ease our financial stress 
3. Improving the way markets function amidst the high volatility

Let’s look at each of the benefits now.

Increase Liquidity 

The key takeaways are:-

1. The MPC unanimously decided to cut the policy rate, while ensuring that inflation remains within projections, by 115 basis points to 4.0 percent.
2. The cash reserve ratio or CRR was slashed by 100 basis points to 3 percent. Used by RBI to control liquidity at commercial banks by having them maintain the CRR as a percentage of their total deposits with RBI, it would mean banks can expand their lending.
3. The reverse repo rate, which is the rate at which the RBI borrows from the commercial banks was reduced by 155 basis points to 3.35 percent. The move would make it relatively unattractive for the commercial banks to lend to the central bank. Instead, they may use the funds to lend to productive sectors to spur the economy.

Benefits To Pass On

The key takeaways are:-

1. While RBI’s monetary policy often nudges commercial banks to behave in a way that transmits the purported benefits to us, this time some benefits were spelled out such as easing our debt servicing for some time.
2. All the commercial banks, financial institutions, cooperative banks, and NBFCs were ‘permitted’ to allow a moratorium of six months on payment of installments for all outstanding term loans as on March 1, 2020 (including home loans, personal loans and even term loans taken out by SMEs). Borrowers would not be penalized if we defer our installments on our loans for the next three months. Such loans won’t be considered as bad loans or NPAs. 

Functioning of Markets

The key takeaways are:-

1. RBI recognized the increased volatility in the currency markets and how that has beaten down the rupee. 
2. The currency markets, derivative in nature, often find RBI intervene to stabilize the rupee. 
3. But FII outflows etc may also depress the rupee’s value, which is beyond RBI’s purview. Hence, this time, the MPC allowed certain banks (those operating under the International Financial Services Centre (IFSC) Banking Units) to participate in the derivatives market from June 1, 2020. The entry of more players may reduce the volatility in the currency markets, as liquidity will be improved, ensuring true price discovery of various instruments.

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