HIGHLIGHTS OF RBI MONETARY STATEMENTSBy- Simran Bais
Due to the recent outbreak globally, the economy is certainly devastated. Monetary Policy Committee which is headed by the Governor of RBI has witnessed that the Indian and global economy is going through the phase of extraordinary and unprecedented condition due to the pandemic, it also stated that the war time efforts are required to combat the economic stress. Reduction of Repo rate The RBI has reduced the repo rate by 75bps and stands at 4.4% in order to revive the investment and enhance the liquidity in the market, to ensure that the reduction in repo rate is transmitted by the commercial banks to the customers, the RBI has decided to cut Reverse Repo Rate by massive 90bps and it stands at 4% when the Reverse Repo rate is lower than the Repo Rates then it pushes the bank to lend this excess liquidity to the customers in the form of cheaper loans, thus helping in reviving the investments. When the reduction in repo rate is transmitted by the Banks to the customers it will result in reduction in EMIs thus creating more purchasing power which in turn helps in creating more demand thus escalating the needs for investment. RBI usually employs the Repo and Reverse Repo Rate on a day to day basis for the banks to manage the liquidity known as Liquidity Adjustment Funds (Herein after referred to as LAF) Decrease in Cash Reserve Ratio In furtherance to this, RBI has decided to decrease the Cash Reserve Ratio (Herein after referred to as CRR) i.e. the cash in hand with the RBI by 100bps in order to inject an additional 1.37 lakh crore such liquidity excess will push to provide easier and cheaper loans and bring into the economy an element of liquidity, the ratio decreased from 4% to 3%. Marginal Standing Facility The other measure taken by the RBI was in consonance to Marginal Standing Facility (referred to as MSF) which is similar to repo rate but only difference between the two is that, in MSF the interest is higher as compared to the repo rate. Through this instrument the banks can borrow money from RBI over and above the LAF window. In LAF banks on a day to day basis rely on employing repo rate and reverse repo rate, if conditions arise and if it is inferred that these two measures are not sufficient then the banks can borrow money from RBI but by paying higher interest rates as compared to the interest of repo rate. Thus, by decreasing the interest rate in MSF of 4.65% and increasing cap from 2% of Statutory Liquidity Ratio (referred to as SLR) raised to 3% will in a way provide more funds to banks amounting to Rs.1.35 lakh crore thus raising the level of investment to a higher level. Long Term Repo Operations RBI has also announced Long Term Repo Operations in order to raise the targeted Rs.1.37 lakh crore investment levels. This was carried out by using the method of auction but the only condition imposed by the RBI was that the banks can certainly make use of this additional liquidity only to invest in Investment great corporate bonds, commercial papers and nonconvertible debentures. 3 months moratorium on EMIs Major reliefs to companies and salaried classed individuals was also sought by the RBI by announcing 3 months moratorium on the payment of EMI. Customers are now exempted to pay the EMI for a period of 3months which is now extended to all the types of loans: whether car loan, home loan or personal loans like credit card dues and also included NBFC under its broad ambit. This is for the loans secured during the period of 1st March 2020- 31st May 2020. It is to be observed as a temporary relief, but the interest will be added to the said transaction. The benefit in this crisis is derived by the customers who are facing loss of income as this temporary relief which is provided won’t affect the credit score thus not resulting into Non Performing Assets for the banks. RBI Monetary Policy is responsive to a great extent and also the measures are taken keeping in view the ground level concerns and through this process a liquidity of 3.74 lakh crore can be generated which implies 3.4% increase in GDP rate, which will give rise to inflation as witnessed during the period of 2008-09 financial crisis. However, its success ratio depends on the implementation strategy of the banks to transmit monetary policy to the customers. However, the uncertainty of the transmission of COVID-19 cannot be denied, it may happen that the pandemic may last for months or a year so, in order to tackle this the fiscal policy and the monetary policy created by the government and the RBI respectively are possibly for the attainment of the short term goals. Since there can be a phase of uncertainty to an extent, it will be wise to curb the present problems with short term measures effectively, once the stability is achieved long term plans can be devised.