With the whole world under the realm of pandemic Coronavirus or COVID-19, the world’s economy has come to halt. Developed countries governments and central banks have come out with several emergency fiscal and monetary measures to tackle the massive social and economic impact that the Coronavirus or COVID-19 crisis is having. From announcing massive economic fiscal stimulus packages, emergency monetary policy actions to complete lockdown, countries are dealing with the pandemic COVID-19 on a war footing.
India is no exception. To prevent the country from entering the third stage of Coronavirus, strict actions have been implemented and executed. From announcing the US $10 million towards COVID-19 emergency fund to Finance Minister Nirmala Sitharaman announcement of Rs 1.7 lakh crore ($23 billion) relief package to provide a safety net for those who are hardest hit by the COVID-19 lockdown, along with insurance cover for frontline medical personnel, the country is leaving no room to control this crisis. In response to the Coronavirus relief package, now India’s central Bank RBI too has come out with its economic relief package. Given below is a brief insight into the RBI’s COVID-19 economic relief package.
RBI’s COVID-19 Relief Package
The Reserve Bank of India’s Monetary Policy Committee has come out with its measures to deal with the economic fallout of COVID-19 or Coronavirus pandemic.
This is the first time that the Committee has met outside its bi-monthly meeting calendar. The steps taken by India’s central bank, RBI is as follows-
- Increasing the liquidity in the system.
- Make sure that a lower policy rate is transmitted on the ground level.
- Three-month for payback on all term loans.
- Steps to provide stability and reduce volatility.
Impact of RBI’s measures announced on the Economy
- A big cut in the repo rate by 75 basis points and bringing it down to 4.4%, RBI has made it easier for entrepreneurs to take loans for working capital and for households for homes, vehicles etc. thus having an overall effect of reducing interest rates for the system. (Remember- Repo rate is the rate at which central bank lends money to commercial banks)
- Cut in reverse repo rate by 90 basis points to 4%, RBI has made it unattractive for commercial banks to park money with the RBI and banks will be nudged to lend. ( Reserve Repo Rate is the rate at which RBI borrows funds from commercial banks)
- Moratorium on Repayments of Loans: RBI has allowed banks to defer payment of Equated Monthly Instalments (EMIs) on home, car, personal loans as well as credit card dues and also defer interest on working capital repayments by 3 months thus addressing the distress among firms as production is down.
- By reducing the Cash Reserve Ratio (CRR) to 3%, RBI has freed up ₹1.37 trillion for banks to lend. CRR has been chosen over SLR because CRR increases ‘primary liquidity’ with the banks in a better way. (CRR is the percentage of demand and time deposits that banks have to keep with the RBI)
- Targeted long-term repo operations: RBI will lend a total of ₹1 trillion money to banks that can be invested in bonds and other forms of lending instruments thus providing financing to credit institutions.
- ₹1.37 trillion will be provided under the emergency lending window called the marginal standing facility or MSF, thus helping banks to borrow 3% of their deposits, up from the current 2%. (MSF- the rate at which the banks can borrow overnight funds from RBI against government securities. MSF is a short term borrowing scheme)
The backbone of any country’s development lies in its thriving economy and RBI by coming out with this relief package, on urgent priority is trying to pull it out of the current bleak situation which Indian economy is facing today. As no one knows how long this crisis will last or what will be the real extent of the damage, this bailout package of RBI is a virus-fighting stimulus to tackle COVID-19 or Coronavirus crisis, thus satisfying the quote “Tough times never last, only tough people and tough institutions do.”
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