From Banks And NBFCs To State Governments, RBI Steps In With Relief

The Reserve Bank of India on Friday announced a host of further measures to support the economy and the financial system. The measures range from relief for banks in classifying bad loans to liquidity support for non-bank lenders and increased emergency funding for state governments.

De Facto Rate Cut & More To Come

The measures announced by the RBI are now the second set of emergency announcements intended to support the economy as it braces for the impact of Covid-19.

While the RBI has not put out a growth projection for the year, the IMF forecasts that the Indian economy will grow at 1.9 percent in 2020-21.

With growth declining and inflation in check, monetary policy is likely to remain accommodative.

On March 27, the RBI had announced a 75-basis-point cut in the policy repo rate to 4.4 percent. While the repo rate, at which the RBI infuses liquidity, is the policy rate, markets tend to use the reverse repo rate as the benchmark during times of surplus liquidity. This is because the reverse repo rate is the rate at which the RBI absorbs liquidity.

By announcing a 25-basis-point cut in the reverse repo rate, the RBI has de facto brought down effective rates further.

It has also signaled room for further rate action.

Detailing the macroeconomic scenario, the RBI governor said that “inflation could recede even further, barring supply disruption shocks and may even settle well below the target of 4 percent by the second half of 2020-21.”

Das added that the overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable.

“Eventually, we shall cure; and we shall endure,” the governor said.