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RBI announces economic measures to counter the coronavirus impact on economy

  • Category
    Economy
  • Published
    13th Aug, 2020

The Reserve Bank of India (RBI) announced a slew of measures in order to provide relief for the ongoing Coronavirus outbreak in India, following a three-day meeting of its six-member Monetary Policy Committee (MPC).

Context

The Reserve Bank of India (RBI) announced a slew of measures in order to provide relief for the ongoing Coronavirus outbreak in India, following a three-day meeting of its six-member Monetary Policy Committee (MPC).

Key-Highlights of the measures

  • Repo rate unchanged at 4%
  • Reverse repo rates unchanged at 3.35%
  • Accommodative stance maintained
  • Allows one-time restructuringof corporate loans
  • LTV ratio for gold loans relaxed to 90% from 75%
  • Introduces mechanism of Positive Pay for all chequesof value Rs 50,000 and above
  • Additional speical liquidity facility of Rs 10,000 crore to be provided to NABARD & NHB

On Forex

  • Ratio of forex reserves to external debt has increased from 76% to 85.5%
  • Forex reserves rose by USD 56.8 billion in FY21 so far from April to July
  • Forex reserves now stand at USD 534.6 bn or 13.4 months of import

On inflation

  • MPC expects headline inflation to remain elevated in Q2FY21
  • MPC expects headline inflation to ease in the second half of FY
  • Inflation pressures evident across all sub-groups
  • More favourable food inflation may emerge on bumper rabi crop
  • High pump prices of fuel could impart cost pressure
  • Inflation base effect favourable in H2
  • External demand expected to remain anaemic due to pandemic

Outlook on the current scenario 

  • For 2021, real GDP growth is expected to be negative
  • Space for further monetary action is available but advisable to be judicious
  • MPC will remain watchful w.r.t. inflation dynamics to further use space available on monetary side when appropriate
  • 250 bps rate cut is working through the system
  • Portfolio inflows to EMs have resumed and EM currencies have appreciated
  • Early signs of revival in May/June subdued in July due to renewed surge in Covid-19 cases
  • High frequency indicators have leveled off after resumption of local lockdowns
  • Producer sentiment on input prices remains muted
  • Supply chain disruptions persist with implications on prices of food & non-food items
  • Protein based food items could be a pressure point
  • OMOs, Twist, LTRO & TLTRO measures being sterilised via reverse repo ops

Additional Measures to Address COVID-19-Triggered Disruptions

The rise of COVID-19 cases under fragile macroeconomic and financial conditions has forced the central bank to come out with additional measures. The objective of these measures is to: 

  • enhance liquidity support for financial markets, other stakeholders
  • further ease financial stress due to COVID-19 disruptions, strengthen credit discipline
  • improve credit flow 
  • deepen digital payment systems
  • augment customer safety in cheque payments
  • facilitate innovations across financial sector

The Monetary Policy Process

Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act. The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

  • The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB determines the policy interest rate required to achieve the inflation target.
  • The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy.
  • This is the first scheduled policy review since February.
  • The RBI's six-member Monetary Policy Committee has already met twice outside its bi-monthly cycle, first in March and then in May, on account of the fast-changing macroeconomic situation arising from the coronavirus pandemic.

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