RBI Monetary Policy 2020: Key Highlights and Takeaways
Created on 13 Oct 2020
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Updated on 16 Oct 2020
The world right now, seems like a scene from an apocalyptic movie, doesn’t it? Movies where natural disasters are running wild, man-made disasters seem to be on the loose, and of course, one deadly disease is spreading like wildfire, which is infecting and spreading among people like a viral video.Of course in the current real world, all of this seems to be turning into reality, except this virus is far deadlier and is spreading faster than any viral TikTok song or video.
The coronavirus pandemic seems to have engulfed the entire world inside it. This virus can be transmitted from one person to another by a mere touch. The only way to prevent ourselves from this deadly virus is social distancing, which forced national governments to impose strict lockdowns throughout the countries. This has primarily impacted the manufacturing businesses, as they had to shut down their operations. And as a result, the world’s largest economies have witnessed a drastic slowdown.
Due to the extended lockdowns imposed to curb the spread of the deadly coronavirus, India’s largely unorganised sector was caught in the middle of a financial crisis. Throughout the country, business operations were shut down; some lost their jobs while others had to face pay cuts. And because of this, a lot of people who have borrowed loans from banks are finding it difficult to pay their EMI’s.
To save people from some of the trouble arising from this situation, the Reserve Bank of India, announced a moratorium on the bank loan interests.
A brief on the previous Moratorium by RBI
Under this new instruction from the RBI, the customers were relieved from the bank loan EMIs for 3 months, but the interest on these EMIs was being accumulated. This Moratorium ended on August 31 2020. This marked the interest of 3 months on loan interest. The loan interest is accumulated monthly; March 1 to May 31, was the moratorium period. This policy aimed to provide relief to the citizens who were facing a financial crisis due to the Covid-19 pandemic and the extension of resultant lockdowns.
The credit information companies were also instructed that if someone was opting for a moratorium, it should not affect their credit score. This policy covered all Term loans, which included all kinds of retail loans such as vehicle loan, home loan, and personal loan, agricultural term loans as well as crop loans.
After this, the loan moratorium was extended till August 31 2020. This extension sought to provide relief to the borrowers without changing the terms and conditions of the Loan Agreement. The borrowers did not have to pay the EMI for this period without any penalty charge. The interest, however, continued to accumulate during the moratorium period.
The current scenario
Since the previous Moratorium has already come to an end, the economic situation is still not stable. There is still unemployment, and people are still facing pay cuts.
So to sort this out, RBI has decided to come up with a Loan restructuring policy. In the new policy, RBI has not extended the moratorium period. Instead, the loans will be restructured. This policy will cover MSME, corporates, as well as retail customers.
Apart from this, several other announcements were made regarding the monetary policy. Let’s discuss.
Key policy decisions taken by RBI
The RBI has not changed the repo rate and the reverse repo rate. So the repo rate remains 4% and reverses repo rate at 3.35%. The Monetary Policy Committee (MPC) also voted in favour of maintaining an accommodative stance as long as it is necessary - at least during the current financial year and into the next financial year - to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target, going forward.
Gold loan value has been increased. Previously if you wanted to take a loan against the gold of rupees 1 Lakh, then the loan amount used to be 75,000. That is 75% of the value of the gold. In the new policy, this per cent has been increased to 90%. So now if you take a loan against the gold of rupees 1 lakh, the loan value will be 90,000.
Measures of RBI to ease the liquidity
To improve liquidity in the market, RBI uses open market operations. Open market operations is a tool used by RBI through which it buys or sells government securities and treasury bills. This is done to improve the money supply in the economy. When the RBI wants to improve liquidity in the market, it buys government securities from the market. Looking at the current situation, RBI announced that it would buy bonds issued by the state government. This will be done through secondary market operations.
Usually, open market operations are for the central government. This is the first time RBI has announced open market operations for the state government. This decision addresses the problem of liquidity in the market and will help with the stability of financial markets.
The RBI announced that it would increase the size of each open market operation for central government bonds up to Rs 20,000 crore. They also announced that rupees 1 lakh crore at a floating rate (prevailing repo rate) would be provided to banks for three years as a part of their long term repo operation.
Changes in the RTGS payment systems
To promote digitalisation in the banking sector, RBI has decided to increase the timing of the Real-Time Gross Settlement (RTGS). So you can use RTGS services from 8 am to 6 pm. This came into effect from August 26.
Changes in the NEFT payment Systems
RBI has now made the NEFT transactions available for 24 hours a day and 365 days a year. This will come into effect for banks from January next year.
The reason behind these changes
The Reserve Bank of India has recently joined an elite club of nations. Owing to this, the nations should have payment systems that enable round-the-clock fund transfer and settlement of any value.
The RBI tweeted after announcing the change. The club includes Hong Kong, the UK, South Korea, Singapore and China. RBI’s digital push may reduce the use of cash and cheque for fund transfer.
The response of RBI towards the ongoing crisis and the policy they came up with is impressive. Through its policies, the RBI has re-established the confidence in the market. RBI’s decision of keeping the policy repo rate unchanged was broadly in line with consensus expectations.
However, the additional measures announced by RBI to improve liquidity, credit flows to specific sectors and conducting Open market operations for State government bonds came in as a surprise. Over the past few months, apart from the reduction in policy rates, RBI has consistently demonstrated its intent to revive growth and has been undertaking conventional and unconventional measures to improve liquidity and maintain comfortable financing conditions.
This real-life, seemingly, apocalyptic movie, is currently economically apocalyptic. The world has been brought to its knees. And in situations like this, when economies are disrupting and breaking open, the central banks of countries have to take the baton in their own hands and have to become the saviours of the global economy, and thus, of mankind.
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