IANS /New Delhi
To mitigate the impact of economic fallout on financial liquidity due to Covid-19 pandemic, the Reserve Bank of India yesterday announced a set of new measures including a reduction in reverse repo rate.
Accordingly, the rate now stands at 3.75% of Liquidity Adjustment Facility (LAF). The reverse repo is an important monetary policy tool used by the Reserve Bank to control liquidity and inflation in the economy.
Under the reverse repo rate, banks deposit excess funds with the RBI and earn interest for it.
The move is expected to encourage banks to ease lending and investments into the economy.
Announcing the slew of measures via online channels, RBI governor said that policy repo rate would for now be maintained at 4.4%.
Further, he announced other measures such as going in for TLTRO 2.0 and re-financing facilities for critical institutions.
Together these would mean an additional liquidity to the tune of Rs1 lakh crore with Rs500,000mn as TLTRO 2.0 and Rs500,000mn refining support to NABARD, NHB and SIDBI.
In terms of liquidity infusion, Das said that RBI will conduct the round two of targeted long-term repo operation (TLTRO) worth Rs500,000mn.
TLTRO is a loan scheme for banks which come at the current repo rate from the RBI.
This type of operation is generally conducted to relieve the banks from some of their debt repayment obligations towards bond holders.
Thus, it boosts cash flows emanating from the banking sector.
“It has been decided to conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of Rs500,000mn, to begin with, in tranches of appropriate sizes,” he said.
“The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50% of the total amount availed going to small and mid-sized NBFCs and MFIs.”
Besides, RBI announced a 90-day extension for the resolution period for large stressed assets which have not been resolved within the 210-day deadline as per the central bank’s June 7, 2019 order.
The RBI governor also said that NPA classification will exclude the moratorium period.
Moreover, in order to ease the liquidity position, the LCR requirement for banks is being brought down from 100% to 80% with immediate effect.
“The requirement shall be gradually restored back in two phases a 90% by October 1, 2020 and 100% by April 1, 2021,” he said.
The apex bank prohibited commercial and co-operative banks from making any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions.
Furthermore, the RBI hinted at further cuts in interest rates to maintain adequate liquidity in the system and counter the intensification of risks to growth and financial stability brought on by Covid-19.
Das said that easing of inflationary pressure on the economy and the outlook that it is on a declining trajectory and could fall further “make policy space available to address the intensification of risks to growth and financial stability brought on by Covid-19.”
Early developments suggest that inflation is on a declining trajectory, having fallen by 170 basis points from its January 2020 peak.
In the period ahead, inflation could recede even further, barring supply disruption shocks and may even settle well below the target of 4% by the second half of 2020-21, Das said while unveiling second instalment of measures aimed at providing liquidity in the economy and allow credit flows to grow. “Such an outlook would make policy space available to address the intensification of risks to growth and financial stability brought on by Covid-19.
This space needs to be used effectively and in time”, he added.
The governor said that the bank 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,” Das said. In addition, the governor cited the IMF projections that has put India among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9%) in 2020.
In fact, this is the highest growth rate among the G-20 economies, Das said that this comes even as the global economy is expected to plunge into the worst recession since the Great Depression, far worse than the global financial crisis. For 2021, the IMF projects sizeable V-shaped recoveries: close to 9 percentage points for the global GDP.
India is expected to post a sharp turnaround and resume its pre-Covid pre-slowdown trajectory by growing at 7.4% in 2021-22, he said. Shaktikanta Das also announced a 90-day extension for the resolution period for large stressed assets which have not been resolved within the 210 day deadline as per the central bank’s June 7, 2019 order. The 90-day extension of inter-bank resolution of stressed assets would be available only to accounts which were within the review period as on March 1, 2020.
In this case, the period from March 1, 2020 to May 31, 2020 shall be excluded from the calculation of the 30-day timeline for the review period.
In respect of all such accounts, the residual review period shall resume from June 1, 2020, upon expiry of which the lenders shall have the usual 180 days for resolution.
Also, in respect of accounts where the review period was over, but the 180-day resolution period had not expired as on March 1, 2020, the timeline for resolution shall get extended by 90 days from the date on which the 180-day period was originally set to expire.
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