RBI sprays virus with huge rate cut

Dubai - Major cuts made to key rates; measures aimed to ease consumer, corporate burden rolled out

The Reserve Bank of India (RBI) on Friday massively reduced its key lending rates in response to the Covid-19 outbreak, cutting the repo rate by 75bps to 4.40 per cent from 5.15 per cent, while allowing banks and finance companies to put a three-month moratorium on term loans.
Consequently, the reverse repo rate was also reduced by 90bps to 4 per cent. While the measures will support equity investors and reduce EMIs for borrowers, and make it cheaper to take new loans, analysts see this as a disheartening development for fixed deposit investors, especially senior citizens and others, including former non-residents who are dependent oninterest income.
RBI governor Shaktikanta Das said the Monetary Policy Committee of the apex bank refrained from projecting inflation and growth this time as the situation was too volatile.
The RBI has also announced a comprehensive package, including measures to expand liquidity, steps to reinforce monetary transmission, efforts to ease financial stress by relaxing repayment and endeavour to improve the functioning of the market. "The world is fighting an invisible assassin," Das said while he announced the slew of measures.
"All commercial, regional, rural, NBFCs and small finance banks are being permitted to allow three-month moratorium on payment of installments in respect of all term loan EMIs outstanding on March 31," the RBI said in a statement.

The RBI governor has clarified that the non-payment of EMIs during the moratorium period will not result in asset classification downgrade. "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," said the RBI.

Financial analysts said such a host of proactive measures taken by the Finance Ministry and the RBI would help the economy during such challenging times. These new bold set of measures by RBI comes just a day after FM Nirmala Sitharaman announced a ?1.7 trillion relief package for the poor and extension of statutory and regulatory compliances in the wake of Covid-19.

Adeeb Ahamed, managing director of LuLu Financial Group, said the support for the MSME sector is a much-needed breather. "It will help companies utilise existing reserves for sustenance, especially as the lockdown and subsequent loss of business have severely affected working capital of companies across India."

He added that the RBI's decision to not downgrade a borrower's credit rating upon availing a moratorium on EMI payments will benefit MSMEs in the short and long run.

"By mentioning explicitly that availing such a moratorium will not affect the risk classification of a loan, the RBI has made its intention clear to support enterprises that are exposed to risk in these trying times. A clean credit history and the de-risking of being classified as an NPA in banking records are important parameters for businesses when they pick up the pieces post this period of economic inactivity."

Surendra Hiranandani, chairman and managing director of House of Hiranandani, said the RBI's promise to "do whatever it takes" is a morale-booster at the right time.

"The RBI governor has also hinted about using unconventional methods if needed. The steps to ease working capital pain, reduce liquidity costs and provide moratorium on term loans will alleviate stress across various sectors and will act as important measures to counter the economic slowdown caused by the pandemic," he said.

The apex bank last cut rates in its October 2019 monetary policy review. This review was rescheduled in wake of the pandemic, originally scheduled to take place on March 31 and April 3.

This is the first time that fixed deposit rates at State Bank of India, India's largest lender, have fallen below 6 per cent since August 2004.

Analysts said it is time-fixed depositors who are reliant on interest income to ponder other options to keep intact their revenue flow. Options include investing in small saving schemes such as National Savings Certificates, Kisan Vikas Patra and Post Office Term deposits. At present, these schemes are earning more than FD rates offered by some of the big banks.

Financial experts said for investors looking for a fixed income avenue, now is the right time to consider small savings schemes, as interest rates on these products are due for review on March 31, and there is a possibility that interest rates on small savings schemes will be reduced given the current state of the economy.

Hiranandani said the moratorium on housing EMI and deferment of interest payments by three months will give a lot of relief to consumers as they can now rearrange their finances.

"Loans on the whole will be cheaper and consumers can save money owing to the measures. Banks will now be persuaded to lend at lower rates of interest and this will put more money in the hands of people and create a higher demand in the overall economy as consumption would go up."

Hiranandani said the cut in reverse repo rate would also make it unattractive for banks to passively deposit funds with the RBI and instead lend it to the productive sectors like industry and agriculture. "The cut in cash reserve ratio together with the above measures will inject greater liquidity into the market and there won't be a shortage of cash flow in the economy. However, quick transmission will be key to the huge liquidity infused bythe  RBI."

- issacjohn@khaleejtimes.com

• India