RBI Announcements(COVID-19 Pandemic):
1.In view of the COVID-19 pandemic, the Monetary Policy
Committee (MPC) decided to advance its meeting scheduled for 31st March, 1st
and 3rd April 2020. It met on 24th, 26th and 27th March and undertook a careful
evaluation of the current and evolving macroeconomic and financial conditions,
and the outlook. I wish to take this opportunity to express my deep gratitude
to the MPC members for their swift response to the unprecedented situation and
for their valuable contribution to the monetary policy decision taken today. I
also wish to thank our teams in the RBI for their continued high-quality
support to the MPC’s work through their hard work, research and logistics.
2.After extensive discussions, the MPC voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target. While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 per cent.
2.After extensive discussions, the MPC voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target. While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 per cent.
3.Simultaneously, the fixed rate reverse repo rate, which sets
the floor of the liquidity adjustment facility (LAF) corridor, was reduced by
90 basis points to 4.0 per cent, thus creating an asymmetrical corridor. The
purpose of this measure relating to reverse repo rate is to make it relatively
unattractive for banks to passively deposit funds with the Reserve Bank and
instead, to use these funds for on-lending to productive sectors of the
economy. It may be recalled that during the month of March so far, banks have
been parking close to ` 3 lakh crore on a daily average basis under
the reverse repo, even as the growth of bank credit has been steadily slowing
down.
4.This decision and its advancement has been warranted by the
destructive force of the corona virus. It is intended to (a) mitigate the
negative effects of the virus; (b) revive growth; and above all, (c) preserve
financial stability.
5.We are living through an extraordinary and unprecedented
situation. Everything hinges on the depth of the COVID-19 outbreak, its spread
and its duration. Clearly, a war effort has to be mounted and is being mounted
to combat the virus, involving both conventional and unconventional measures in
continuous battle-ready mode. Life
in the time of COVID-19 has been one of unprecedented loss and isolation. Yet,
it is worthwhile to remember that tough times never last; only tough people and
tough institutions do.
6.In the recent period, the Reserve Bank has been
in action on a daily basis with efforts to alleviate financial stress, build
confidence and keep the financial system sound and functioning. Measures taken
by the Reserve Bank are given below.
*a cumulative
reduction in the policy repo rate of 135 basis points;
*accommodative stance of monetary policy as long as necessary
to revive growth, while keeping inflation within the target.
*two USD buy/sell swap auction of USD 5 billion each
conducted on March 26 and April 23, 2019, injecting liquidity into the banking
system amounting to ₹34,561 crore and ₹34,874 crore, respectively.
seven open market purchases, injecting ₹92,500 crore into
the system.
*four simultaneous purchase and sale of government securities
under Open Market Operations (special OMOs or what is known as operation twist) during December and
January (December 23 and 30, 2019 and January 6 and 23, 2020) to ensure better
monetary policy transmission.
*five long term repo operations (LTROs) between February 17
and March 18, 2020 for one-year and three-year tenors amounting to ₹1,25,000
crore of durable liquidity at reasonable cost (fixed repo rate).
*exemption on incremental credit disbursed by banks between
January 31 - July 31, 2020 on retail loans for automobiles, residential housing
and loans to micro, small and medium enterprises (MSMEs) from the maintenance
of cash reserve ratio (CRR).
*two 6-month US Dollar sell/buy swap auction providing dollar
liquidity amounting to USD 2.71 billion.
*fine-tuning variable rate repo auctions of ₹50,000 crore and
₹25,000 crore of 8 days and 3 days maturity on March 26 and March 31,
respectively, with standalone primary dealers (SPDs) allowed to participate.
*fine-tuning variable rate Repo auctions of 16-day maturity
amounting to ₹77,745 crore on March 23-24, 2020.
*The amount under the Standing Liquidity Facility (SLF)
available for standalone primary dealers was enhanced from ₹2,800 crore to
₹10,000 crore on March 24, 2020 and this will be available till April 17, 2020.
7.Let me assure all that the Reserve Bank is at work and in
mission mode, monitoring the evolving financial market and macro-economic
conditions; and calibrating its operations to meet any need for additional
liquidity support as well as other measures, as may be warranted. It is our effort to
ensure normal functioning of markets, nurture the impulses of growth and
preserve financial stability. Incidentally, we have quarantined 150 members of our
staff and service providers together with the IT facilitators as a part of our
Business Continuity Plan (BCP). The plan was prepared and executed in a matter
of days.
8.The MPC noted that global economic activity has come to a
near standstill as COVID-19 related lockdowns and social distancing are imposed
across a widening swathe of affected countries. Expectations of a shallow
recovery in 2020 from 2019’s decade low in global growth have been dashed. The
outlook is now heavily contingent upon the intensity, spread and duration of
the pandemic. There is a rising probability that large parts of the global
economy will slip into recession.
9.Turning to growth in India, the implied real GDP growth of
4.7 per cent for Q4:2019-20 in the second advance estimates of the National
Statistics Office, released in February 2020, within the annual estimate of 5
per cent for the year as a whole is now at risk from the pandemic’s impact on
the economy. As regards the outlook for 2020-21, apart from the continuing
resilience of agriculture and allied activities, most other sectors of the
economy will be adversely impacted by the pandemic, depending upon, I repeat,
its intensity, spread and duration. If COVID-19 is prolonged and supply chain
disruptions get accentuated, the global slowdown could deepen, with adverse
implications for India. The slump in international crude prices could, however,
provide some relief in the form of terms of trade gains. Downside risks to
growth arise from the spread of COVID-19 and prolonged lockdowns. Upside growth
impulses are expected to emanate from monetary, fiscal
and other policy measures and the early containment of COVID-19.
10.As regards inflation, the prints for January and February
2020 indicate that actual outcomes for the quarter are running 30 bps above
projections, reflecting the onion price shock. Looking ahead, food prices may
soften even further under the beneficial effects of the record foodgrains and
horticulture production, at least till the onset of the usual summer uptick.
Furthermore, the collapse in crude prices should work towards easing both fuel
and core inflation pressures, depending on the level of the pass-through to
retail prices. As a consequence of COVID-19, aggregate demand may weaken and ease
core inflation further. Heightened volatility in financial markets could also
have a bearing on inflation. Given this heightened volatility, unprecedented
uncertainty and extremely fluid state of affairs, projections of growth and
inflation would be heavily contingent on the intensity, spread and duration of
COVID-19. Precisely for these reasons, the MPC refrained from giving out
specific growth and inflation numbers.
11.The MPC noted that macroeconomic risks, both on the demand
and supply sides, brought on by the pandemic could be severe. The need of the
hour is to do whatever is necessary to shield the domestic economy from the
pandemic. Central banks across the world have responded with monetary and
regulatory measures – both conventional and unconventional. Governments across
the world have unleashed massive fiscal measures, including targeted health
services support, to protect economic activity from the impact of the virus.
The Government of India has yesterday announced a number of measures. The MPC
further noted that the Reserve Bank has taken several measures to inject
substantial liquidity in the system. Nonetheless, the priority is to
undertake strong and purposeful action in order to minimise the adverse
macroeconomic impact of the pandemic. It also underscored the need for all
stakeholders to fight against the pandemic. Banks and other financial
institutions should do all they can to keep credit flowing to economic agents
facing financial stress on account of the isolation that the virus has imposed.
Market participants should work with regulators like the Reserve Bank and the
SEBI to ensure the orderly functioning of markets in their role of price
discovery and financial intermediation. Strong fiscal measures are of course
critical to deal with the situation.
12.To summarise, COVID-19 stalks the global economy and the
outlook is highly uncertain and negative. Several nations are battling its
exponential contagion; countries are shutting down to prevent being sucked into
that black hole. Authorities all over the world are mobilising on a massive
scale to fight an invisible assassin. India has locked down. Economic activity
and financial markets are under severe stress. Finance is the lifeline of the
economy. Keeping it flowing is the paramount objective. The time has come for
the Reserve Bank to unleash an array of instruments from its arsenal to staunch
and mitigate the impact of COVID-19, revive growth and, above all, preserve
financial stability. The aggressive action and stance of the MPC provides a
befitting launching pad. In turn, the configuration of initiatives unveiled in
the Statement on Developmental and Regulatory Policies - which I am now going
to announce - amplify the MPC’s decision and leverages on it as well.
Accordingly, it is appropriate that the MPC’s decision and the Reserve Bank’s
actions be regarded as a comprehensive package with force multipliers.
13. The developmental and regulatory policies
can be broadly delineated under four categories:
(1)measures to expand liquidity in the system sizeably to
ensure that financial markets and institutions are able to function normally in
the face of COVID-19 related dislocations;
(2)steps to reinforce monetary transmission so that bank credit
flows on easier terms are sustained to all those who have been affected by the
pandemic;
(3)efforts to ease financial stress caused by COVID-19
disruptions by relaxing repayment pressures and improving access to working
capital; and
(4)endeavor to improve the functioning of markets in view of
the high volatility experienced with the onset and spread of the pandemic.
I.Liquidity Measures
14.A multi-pronged approach, comprising both targeted and
system-wide liquidity provision, has been adopted to ensure that COVID-19
related liquidity constraints are eased.
Targeted Long Term Repo Operations (TLTRO)
15.Large sell-offs in the domestic equity, bond and forex
markets have intensified redemption pressures. Liquidity premia on instruments
such as corporate bonds, commercial paper and debentures have surged. Financial
conditions for these instruments, which are used, inter alia, to access working
capital in the face of the slowdown in bank credit, have also tightened. To
mitigate the adverse effects on economic activity leading to pressures on cash flows across sectors, the Reserve Bank
will conduct auctions of targeted term repos of up to three years tenor of
appropriate sizes for a total amount of up to `1,00,000 crore at a floating
rate, linked to the policy repo rate. Liquidity availed under the scheme by
banks has to be deployed in investment grade corporate bonds, commercial paper
and non-convertible debentures over and above the outstanding level of their
investments in these bonds as on March 25, 2020. Eligible instruments comprise
both primary market issuances and secondary market purchases, including from
mutual funds and non-banking finance companies. Investments made by banks under
this facility will be classified as held to maturity (HTM) even in excess of 25
per cent of total investment permitted to be included in the HTM portfolio.
Exposures under this facility will also not be reckoned under the large
exposure framework. The first auction of `25,000 crore will be conducted today.
The relevant notification is being issued separately.
Cash Reserve Ratio
16.It is observed that, despite ample liquidity in the system,
its distribution is highly asymmetrical across the financial system, and
starkly so within the banking system. To help banks tide over the disruption
caused by COVID-19, it has been decided to reduce the cash reserve ratio (CRR)
of all banks by 100 basis points to 3.0 per cent of net demand and time
liabilities (NDTL) with effect from the reporting fortnight beginning March 28,
2020 for a period of one year. This reduction in the CRR would release primary
liquidity of about `1,37,000 crore uniformly across the banking system in
proportion to liabilities of constituents rather than in relation to holdings
of excess SLR.
17.Furthermore, taking cognisance of
hardships faced by banks in terms of social distancing of staff and consequent
strains on reporting requirements, it has been decided to reduce the
requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per
cent, effective from the first day of the reporting fortnight beginning March
28, 2020. This is a one-time dispensation available up to June 26, 2020.
Marginal Standing Facility
18.In view of the exceptionally high volatility in domestic
financial markets which brings in phases of liquidity stress and to provide
comfort to the banking system, it has been decided to increase the
accommodation under the marginal standing facility (MSF) from 2 per cent of the
statutory liquidity ratio (SLR) to 3 per cent with immediate effect. This
measure will be applicable up to June 30, 2020. This measure should provide
comfort to the banking system by allowing it to avail an additional ` 1,37,000
crore of liquidity under the LAF window in times of stress at the reduced MSF
rate announced in the MPC’s resolution.
19.These three measures relating to TLTRO, CRR and MSF will
inject a total liquidity of `3.74 lakh crore to the system.
Widening of the Monetary Policy Rate Corridor
20.In view of persistent excess liquidity, it has been decided
to widen the existing policy rate corridor from 50 bps to 65 bps. Under the new
corridor, the reverse repo rate under the liquidity adjustment facility (LAF)
would be 40 bps lower than the policy repo rate, as against existing 25 bps.
The marginal standing facility (MSF) rate would continue to be 25 bps above the
policy repo rate.
II.Regulation and Supervision
21.Alongside liquidity measures, it is important that steps are
taken to mitigate the burden of debt servicing brought about by disruptions on
account of COVID-19 pandemic. Such steps, in turn, will go a long way to
prevent the transmission of financial stress to the real economy, and ensure
the continuity of viable businesses and provide relief to borrowers in these
extraordinarily troubled times. These measures include moratorium on term
loans; deferring interest payments on working capital; easing of working
capital financing; deferment of implementation of the net stable funding ratio;
and the last tranche of the capital conservation buffer.
Moratorium on Term Loans
22.All commercial banks (including regional rural banks, small
finance banks and local area banks), co-operative banks, all-India Financial
Institutions, and NBFCs (including housing finance companies and micro-finance
institutions) (“lending institutions”) are being permitted to allow a
moratorium of three months on payment of instalments in respect of all term
loans outstanding as on March 1, 2020.
Deferment of Interest on Working Capital Facilities
23.In respect of working capital facilities sanctioned in the
form of cash credit/overdraft, lending institutions are being permitted to
allow a deferment of three months on payment of interest in respect of all such
facilities outstanding as on March 1, 2020. The accumulated interest for the
period will be paid after the expiry of the deferment period.
The moratorium on term loans and the
deferring of interest payments on working capital will not result in asset
classification downgrade.
Easing of Working Capital Financing
24.In respect of working capital facilities sanctioned in the
form of cash credit/overdraft, lending institutions are allowed to recalculate
drawing power by reducing margins and/or by reassessing the working capital
cycle for the borrowers. Such changes will not result in asset classification
downgrade.
25.The moratorium on term loans, the deferring of interest
payments on working capital and the easing of working capital financing will
not qualify as a default for the purposes of supervisory reporting and
reporting to credit information companies (CICs) by the lending institutions.
Hence, there will be no adverse impact on the credit history of the beneficiaries.
Deferment of Implementation of Net Stable Funding Ratio
(NSFR)
26.The Net Stable Funding Ratio (NSFR), which reduces funding
risk by requiring banks to fund their activities with sufficiently stable
sources of funding over a time horizon of a year in order to mitigate the risk
of future funding stress, was required to be introduced by banks in India from
April 1, 2020. It has now been decided to defer the implementation of NSFR by
six months to October 1, 2020.
Deferment of Last Tranche of Capital Conservation Buffer
27.The capital conservation buffer (CCB) is designed to ensure
that banks build up capital buffers during normal times (i.e., outside periods
of stress) which can be drawn down as losses are incurred during a stressed
period. Considering the potential stress on account of COVID-19, it has been decided
to further defer the implementation of the last tranche of 0.625 per cent of
the CCB from March 31, 2020 to September 30, 2020.
III.Financial Markets
28.The measure for financial markets assumes importance in the
context of the increased volatility of the rupee caused by the impact of
Covid-19 on currency markets.
Permitting Banks to Deal in Offshore Non-deliverable Rupee
derivative Markets (Offshore Rupee NDF Markets)
29.The offshore Indian Rupee (INR) derivative market - the
Non-Deliverable Forward (NDF) market - has been growing rapidly in recent
times. At present, Indian banks are not permitted to participate in this
market, although the benefits of their participation in the NDF market have
been widely recognised. The time is apposite to improve efficiency of price
discovery. Accordingly, banks in India which operate International Financial
Services Centre (IFSC) Banking Units (IBUs) are being allowed to participate in
the NDF market with effect from June 1, 2020.
30.Since the last MPC meeting of February 2020, the Reserve
Bank has injected liquidity of `2.8 lakh crore through various instruments,
equivalent to 1.4 per cent of our GDP. Together with the measures announced
today, RBI’s liquidity injection works out to about 3.2 per cent of GDP.
31.The RBI will continue to remain vigilant and take whatever
steps are necessary to mitigate the economic impact of COVID-19 and preserve
financial stability. As I had stated earlier, all instruments – conventional
and unconventional – are on the table.
32. Before I conclude, let me reiterate that
the Indian banking system is safe and sound. In the recent past, COVID-19
related volatility in the stock market has impacted share prices of banks as
well, resulting in some panic withdrawal of deposits from a few private sector
banks. It would be fallacious to link share prices to safety of deposits. As I
have mentioned in my earlier interaction with the media, depositors of
commercial banks including private sector banks need not worry on the safety of
their funds. I would, therefore, urge members of public as well as the public
authorities, who have deposits in private sector banks, not to resort to any panic
withdrawal of their funds.
33.In conclusion, let me say that, in spite of the very
challenging environment, I remain optimistic. It is worthwhile bearing in mind
that the macroeconomic fundamentals of the Indian economy are sound and, in
fact, stronger than what they were in the aftermath of the global financial
crisis – the fiscal deficit and the current account deficit are now much lower;
inflation conditions are relatively benign; and financial volatility measured
by change in stock prices from recent peaks and average daily change in the
exchange rate of the rupee is distinctly lower. COVID-19 is upon us; but this
too shall pass. We need to remain careful and take all precautionary measures. I
leave you with this comforting thought. Stay clean. Stay safe. Go digital.
Click Here to Download PDF of RBI Governor’s Statement - Seventh Bi-monthly Monetary Policy Statement, 2019-20, March 27, 2020
https://rbidocs.rbi.org.in/rdocs/Content/PDFs/GOVERNORSTATEMENT5DDD70F6A35D4D70B49174897BE39D9F.PDF
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