Obviously, the market is not very happy with the RBI moves. At this point of time, the market is like a pouting spoilt child – nothing will make it happy. Well, the only thing which will actually make it ecstatic is the news on Covid tapering and maybe the discovery of a treatment or vaccine. On one hand, there is RBI and FM who are giving sops but on the other, the cases in India are on the rise, peaking at its highest. The market is probably construing this new largesse from RBI as an acknowledgment that things are bad and we are in for the long haul – that is also exactly what the RBI mentioned in its outlook and that, more than the reduction in rates, pulled down the moods. The market is today facing the reality of this being a really long haul to even some semblance of recovery. Then there is also the overhang of all this having an impact on the banks and the financial sector as a whole. But the truth is that as of now, we need to do what is required.
Today RBI announced:
- Reduction in repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4% from 4.4% with immediate effect
- The marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25% from 4.65%
- The reverse repo rate under the LAF stands reduced to 3.35% from 3.75%
- The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
- The RBI said that these decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
- Extension of moratorium on term loan instalments by another three months, i.e., from June 1, 2020 to August 31, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by another three months.
Measures for export/import:
- Increase the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to 15 months, for disbursements made up to July 31, 2020.
- Extension of line of credit of Rs. 15,000 crore to the EXIM Bank for a period of 90 days from the date of availment with rollover up to a maximum period of one year so as to enable it to avail a US dollar swap facility to meet its foreign exchange requirements.
- Extension of time period for completion of remittances against normal imports into India (except in cases where amounts are withheld towards guarantee of performance) from six months to twelve months from the date of shipment for such imports made on or before July 31, 2020.
Measures to ease financial stress:
- Deferment of interest on working capital facilities from June1, 2020 to August 31, 2020, in addition to the three months allowed on March 27, 2020 on payment of interest in respect of all such facilities outstanding as on March 1, 2020.
- Lending institutions are permitted to convert the accumulated interest on working capital facilities over the deferment period (up to August 31, 2020) into a funded interest term loan which shall be repayable not later than the end of the current financial year (i.e., March 31, 2021).
- Exemption from being considered as defaulter in supervisory reporting and reporting to credit information companies
- Extension of resolution for stressed assets, asset classification standstill by excluding moratorium period of three months
The RBI, while giving its outlook, said:
- The inflation outlook is highly uncertain; it expects headline inflation to go below target in Q3 and Q4 of 2020-21
- On growth outlook, economic activity other than agriculture is likely to remain depressed in Q1:2020-21 in view of the extended lockdown.
- Recovery in economic activity is expected to begin in Q3 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives.
- For the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant.
- The MPC is of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress.
Thus as of now, from where we all are standing today, the outlook looks dim. But we don’t know how the view would be a month from now. We are living in extremely uncertain times and the dynamics keep on changing. Maybe next year, this time, we will be on the other extreme side of the spectrum where demand is booming and economy is back on track.