Rate cut and loan-repayment moratorium: How RBI is trying to reduce pandemic stress

RBI MPC statement on coronavirus pandemic explained

India coronavirus lockdown: Outside a bank in Prayagraj on March 25, 2020. (PTI Photo)

The RBI's Monetary Policy Commitee (MPC) on Friday (March 27) reduced the policy repo rate by 75 basis points to 4.4 per cent to help arrest the slide in economic growth in the wake of the COVID-19 outbreak.

Governor Shaktikanta Das said his address was coming amidst "extraordinary circumstances" and that the MPC voted for "sizeable reduction" in repo rate to revive growth and the mitigate the impact of the pandemic outbreak. This comes a day after Finance Minister Nirmala Sitharaman announced a slew of relief measures aimed at the more vulnerable sections of society.

This was the first time that the MPC met outside its bi-monthly meeting calendar. The policy was scheduled to be announced on April 3 earlier.

Relief for companies

The RBI governor announced a moratorium on term loans and indicated that deferment of interest payment will not result in asset classification downgrade, a major worry for small and medium businesses that have downed their shutters.

The RBI also allowed lending institutions, banks to defer interest on working capital repayments by 3 months -- again a move aimed at addressing the distress among firms as production is down.

The RBI Governor also said banks may reassess the working capital cycle, and that they won't be treated as NPA. The MPC voted with a 4:2 majority to cut repo rate by 75 basis points to 4.4 per cent.

Macro indicators

The Governor said that growth outlook will depend on the intensity, speed, and duration of the pandemic, but indicated the growth projections for the year was at risk. The MPC refrained from giving growth and inflation projections, given the uncertainty in the situation. But it clearly highlighted downside risks to growth from a prolonged lockdown.

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Why did market fall?

Equities climbed off the day's high after the RBI Governor said that India's FY20 GDP growth forecast of 5 per cent was now at risk.

The RBI Governor also indicated that the large sell-offs in markets have intensified pressure. RBI will conduct LTRO (long term repo operations) of up to 3-year tenure of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate. The first auction of Rs 25,000 cr will be conducted later on Friday.

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