RBI's bi-monthly MPC meeting ahead of its scheduled one from June 3 to June 5, 2020, surprised the markets, the announcements by RBI Governor were more or less in line with the expected ones. The repo rate was slashed by 40 basis points to 4 percent; reverse repo rate reduced by 40 basis points to 3.35%; accordingly, bank rate and the msf rate stands reduced to 4.25%. The MPC also decided to continue with accommodative stance to revive growth and mitigate Corona virus impact. According to RBI, the country's foreign exchange reserves reached US $ 487 billion, which is equivalent to 12 months of imports. Meanwhile, RBI is expecting FY20-21 GDP to remain in negative due to Corona virus pandemic. Following rate cut announcements, the banks' are likely to pass on the benefit by reducing marginal cost lending rate (MCLR), which, in turn, would lead to reduction in retail loan interest rates linked to MCLR.
Liquidity and Monetary Measures
The first set of liquidity was infused into system when RBI announced repo rate cut by 75 basis points to 4.40%; reverse repo rate by 90 basis points to 4%; accordingly, MSF rate and the Bank rate stands reduced to 4.65%; Cash Reserve Rate (CRR) was cut by 100 basis points to 3%, on 27th March 2020. These set of measures released liquidity into system to the extent of Rs 3.74 lakh crores, which included Targeted Long-Term Repo Operations (TLTRO) worth Rs 100,000 crore. On April 17, the RBI announced second set of liquidity measures in the form of TLTRO of Rs 50,000 crore and special refinance facilities for a total amount of Rs 50,000 crore to SIDBI, NHB and NABARD to meet sectoral needs. RBI has so far announced various liquidity and monetary measures, amounting to Rs 8.04 lakh crore.
Extension of Moratorium
RBI announced an extension of the moratorium on loan EMIs by 3 months till 31st August 2020, thereby taking total moratorium period to 6 months beginning 1st March 2020. This extension comes as a big relief to borrowers as they can opt not to pay the loan EMIs during moratorium period. The extension of moratorium period means borrowers rating/credit score will not be affected during this period even if EMIs on mortgage loans, auto loans are not paid. This will provide relief to self-employed, MSMEs, those encountering difficulties in servicing their loans due to cash flow issues and income disruptions. However, those opting for moratorium will continue to bear interest costs during moratorium period, which will increase overall interest costs that will lead to increase in EMI amount or loan tenure. The accumulated interest for the deferment period on working capital facilities could be paid till 31st March 2021. On the other hand, lenders are worried how assets-liabilities mismatch would be met, particularly, in respect of NBFCs. Further, suspension of cash flow during moratorium period, and IBC cases suspension is going to stretch financing capabilities of the banks also.
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