RBI reduces key lending rates, extends moratorium period

To lessen the double whammy impact of subdued demand a long with lower production on account of COVID-19 pandemic, the Reserve Bank of India (RBI) on Friday reduced its key lending rates and extended the moratorium period for interest payments on term loans.

Accordingly, the Monetary Policy Committee (MPC) of the central bank in an unscheduled meet reduced the repo rate by 40 basis points to 4 per cent from 4.40 per cent.

Consequently, the reverse repo rate has automatically been reduced to 3.35 per cent 3.75 per cent.

Apart from the MPC’s rate cut, the Apex bank announced other major decisions keeping in mind the devastating economic impact of COVID-19 pandemic. In one such decision, the Reserve Bank extended the moratorium on interest payments on all term loans for another three months.

The RBI also allowed for repayment of accumulated interest on account of the moratorium through FY21. Furthermore, it has decided to increase the group exposure limit to 30 per cent from the current 25 per cent of the eligible capital base of a bank in view of the coronavirus pandemic.

The increased limit will be applicable up to June 30, 2021.

Besides, the Reserve Bank extended a credit line of Rs 15,000 crore to the Export-Import (EXIM) Bank of India.

Making the announcements through an online address, RBI Governor Shaktikanta Das said the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated.

“The MPC is of the view that that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated.” “Beyond the destruction of economic and financial activity, livelihood and health are severely affected. Judging that the risks to growth are acute, while the risks to inflation are likely to be short-lived, the MPC believes that it is essential now to instil confidence and ease financial conditions fur ther.” “This will facilitate the flow of funds at affordable rates and rekindle investment impulses.” Besides, he cited that high frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments.

“Electricity and petroleum products consumption - indicators of day to day demand - have plunged into steep declines. The double whammy in terms of losses of both demand and production has, in turn, taken its toll on fiscal revenues,” RBI Governor said.

“Investment demand has been virtually halted by a decline of 36 per cent in the production of capital goods in March, which was coincident with a contraction of 27 per cent in imports of capital goods in March and 57.5 per cent in April.” According to him, the biggest blow from COVID-19 has been to private consumption, which accounts for about 60 per cent of domestic demand.

Resultantly, India’s GDP growth rate for the financial year 2020-21 is likely to be in the negative territory due.

He added that if the inflation trajectory evolves as expected, more space will open up to address the risks to growth. In a bid to ease the pressure of interest repayment on borrowers, the Reserve Bank of India has deferred the interest repayment on working capital facilities for three months and has allowed the repayment of accrued interests in tranches by March 31, 2021.

Announcing a slew of liquidity easing measures on Friday, RBI Governor Shaktikanta Das on Friday said in respect of working capital facilities sanctioned in the form of cash credit or overdraft, lending institutions are being permitted to allow a deferment of another three months, from June 1, 2020 to August 31, 2020.

In March, the central bank allowed a three month deferment till May 31 on payment of interest in respect of all working capital facilities outstanding as on March 1, 2020.

“In order to ameliorate the difficulties faced by borrowers in repaying the accumulated interest for the deferment period on working capital facilities in one shot, 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 (March 31, 2021),” said the RBI statement.

Further, in a big relief to the corporate sector the RBI on Friday allowed a three-month extension of moratorium on payment of instalment with respect to all term loans outstanding on March 1, 2020.

The moratorium, as announced by RBI on March 27, was ending on May 31. This has been extended till August 31 now.

The Confederation of Indian Textile Industry (CITI) has hailed the measures announced by RBI Governor Shaktikanta Das on Friday which are aimed at preserving the financial stability in the system and improving the functioning of the market.

These announcements will revive the market, boost exports and imports and debt servicing, said T. Rajkumar, Chairman, CITI.

CITI Chairman thanked the RBI Governor for reducing the repo rate by 40 basis points under the liquidity adjustment facility (LAF) bringing it down to 4.0 per cent from 4.40 per cent with immediate effect. Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25 per cent from 4.65 per cent; and the reverse repo rate under LAF now stands reduced to 3.35 per cent from 3.75 per cent.

Indo-Asian News Service