General

COVID-19 And Slash Of Repo Rate By RBI

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This Blog is written by Rohan Singh from University of Petroleum and Energy Studies, Dehradun. Edited by Saumya Tripathi.

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INTRODUCTION

Currently, whole world is suffering from COVID-19 pandemic that made a great loss of both the mankind and of the economy. Recently, there was a survey conducted by industry body FICCI and tax consultancy Dhruva. They took responses from around 380 different companies from different sectors. According to the findings, COVID-19 had a disastrous effect on Indian businesses and it has caused an immense collapse in economy over last few weeks. FICCI further stated that the survey clearly shows that unless a substantive economic package is announced by the Indian government, a permanent impairment of a large industrial section would be seen and they may lose the opportunity to come back again. The World Bank and rating agencies revised the growth in the year 2021 and it was found that the figures were lowest and wasn’t seen in last three decades. This brought RBI to take such steps that can normalize the economy by slashing repo rate.

Repo rate also stands as the benchmark interest rate or repurchase rate, is the rate at which central bank of a country i.e. RBI (Reserve Bank of India), in case of India and is the Monetary Policy tool of other central banks around the world as well that do have different objectives in order to control the credit availability, economic growth, inflation, etc.

In India, the RBI lends money to commercial banks in the situation when there are insufficient funds. The Governor of RBI is the exercising body or authority who, over the meeting of the MPC i.e. Monetary Policy Committee, decides the Repo Rate on various terms. From very interest rates on loans to the returns on deposits is affected by the crucial rate that is set by the RBI, because of which the interest rates on home loans, loans on cars and all different kinds of borrowings faces peaks and troughs that is completely based on the direction of the change in Repo Rate. In the same manner, the banks also adjust saving account, fixed deposit return that is completely based on this benchmark. The bank earns an interest rate when they purchase government securities from RBI for the particular span.

When there is a situation of inflation, central bank increases the repo rate. This acts as a discouragement for the commercial banks to borrow funds from central bank. This automatically reduces the supply of money in the economy and so on arrests the inflation situation and at the opposite situation i.e. at the time of deflation, the circumstances are reversed by the central bank and thus forms a part of the liquidity adjustment facility.

IMPACT OF COVID-19 IN THE ECONOMY OF THE COUNTRY

The effect of the COVID-19 was badly felt in the most developed countries such as USA, Germany, Britain, etc. India was sure to face circumstances not only because of its internal slowdown but also because of the international recession. India learned from what countries like Italy and Spain faced and thus took major steps and used all its machinery and material into motion so that it could be controlled before it’s too late. The 1st lockdown so called JANTA CURFEW was started by Prime Minister of India resulting every activity from essential supplies came to halt.

The foreign markets activity is slow and hence affected the various sectors that include logistics, auto, tourism, metals, drugs, pharmaceuticals, electronic goods, MSMEs, etc. The outbreak of coronavirus disease was first identified in Wuhan, the capital of Hubie China, in December 2019 and from then it has spread globally which was recognized as a pandemic by the World Health Organization. It caused noticeable impact in various sectors, 45% of the total Indian import of electronic is from China. Two-fifths of the organic chemicals are also imported from China. More than 25% of automotive parts, around 70% of pharmaceutical ingredients and 90% of different mobile phone are imported from the same country.

There was report by UN that estimated an impact on trade of more than USD 350 million on India because of this pandemic. Asian Development Bank also estimated that the loss of up to USD 29.9 billion took place in Indian economy and on a single day i.e. on 12^th of March, 2020, there was a crash in Indian Stock Market by 2352.6 points that was a huge concern for all economist and economy advisors.

Taking into consideration of its intensity and the density of the population is highest in the world it was seen that in a month the unemployment was raised to 26% and it is estimated that around 140 million people have lost their jobs in this lockdown while other faced the cut off in their salaries. The Indian economy lost around 32,000 crore each day during lockdown 1.0. The major companies in India, that are Bharat Forge, UltraTech Cement, Larsen & Toubro, Aditya Birla, BHEL, etc. for the time being are suspended or have reduced the operations and other young startups suffered as their funding has fallen. Also the impact has been noticed by the interaction of demand that is compressed and the supply disruptions. The health and livelihood especially of the migrants are severely affected so the necessary steps to ease financial conditions were required. To deal with such condition, the Government at Union and as well as at State level took necessary actions on war footing so overcome such pandemic as it was clearly known that this disease do not have any medical cure.

SIGNIFICANCE OF THE SLASHING THE REPO RATE AND OTHER STEPS BY RBI

When the Finance Bill for the year 2020-2021 was presented, the Union Government with reasons estimated the growth in India’s GDP rate (real growth + inflation) of 10 percent but now it seem that this is far from reality. The fall in the demand and production activities, fall in price of crude oil and ban on trade with foreign countries could bring down the growth rate of country from 4.5% to 2.5% making Indian market one of the top worst affected economy in the world.

To stabilize such a drastic situation of the country’s economy in the coming years, RBI committee, MPC taking in view on the impact of this COVID 19 pandemic that is more severe on macroeconomic and various other sectors of economy that is facing acute stress, took significant steps by unexpectedly slashing the repo rate (the interest in rate that RBI charges from bank for the funds) by 40 bps (basic points) to 4 per cent and also the reverse repo rate by 40 bps to 3.35 per cent. The other step took by RBI was the extension of moratorium on the repayment of loans for another three months i.e. till 31^st of august. The RBI has also allowed its borrowers and bank to change the interest charge in this moratorium period into a term loan that can further be repaid by March of 2021.

Monetary Policy Report was published by RBI on which it has commented on various issues of economy, be it related to forecast under irregularities in a cyclical downturn, supply management, sentiments of media, factors that affect rural demand, sentiments on economic growth, etc. which was not encouraging in relation to the impact of coronavirus.

When it comes to working capital facilities, borrowers facing stress because of sanctioned in the form of CC/OD due to the fallout of economy, the institutions lending may recalculate the ‘drawing power’ by reassessing the working capital cycle or by reducing its margins.

When there is exposure of any lending institution to a borrower of Rs. five crore or more, the bank must make an MIS on the reliefs that the borrowers are provided with which must inter alia contain borrower wise and credit facility wise information about the amount and nature of so granted relief.

RBI also decided to open a special liquidity facility for the mutual fund of Rs. Fifty thousand crores that must be used by banks only for meeting the liquidity requirements of the mutual funds by extending the loans and considering outright purchase of repos from the investment grade corporate bonds collaterals, commercial papers, certificates of Deposit (CDs), commercial papers (CPs)

These steps by RBI made easier for banks to take funds and also aiding them to make lending rate cheaper hence the EMIs on auto, home, term and personal loan will be cheaper in the coming time. Commercial banks will also be slashing the deposit rates on different tenures to balance its position regarding asset and liability. This will stabilize the operations and help banks to restart their units.

STATUTORY PROVISION

The slash in repo rate by Reserve Bank of India was done in exercise of the power conferred in The Reserve Bank of India Act, 1934 under CHAPTER III D REGULATION OF TRANSACTIONS IN DERIVATIVES, MONEY MARKET INSTRUMENTS, SECURITIES, ETC, sub-section 45W i.e. power to regulate the transactions in derivatives money market instruments, etc. considering it necessary in the interest of the public and financial system of the country, issue directions to all the eligible to participate or to transact business in repos in India.

The cause (1) of this sub section states that for the public interest or in regulation of the financial system for the benefit of the country, the bank may decide the policy related to interest rate or interest rate products and directing in that content to all agencies or any of them, that deals with securities, money markets instruments, foreign exchange, derivatives, or other instruments of like nature as the bank may specify from time to time.

Further it is provided that the directions issued under sub section 45W shall not be related to the procedure for settlement or execution of the trades in context of the transactions mentioned therein, on the Stock Exchanges recognized under section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) .

The clause 2 of this sub section states that the bank also may for the purpose of enabling this to the regulating agencies that is referred in sub section clause (1), can call for any sort of information, statement or other particulars than these from them or also can cause an inspection of such agencies to be made.

ANALYSIS

India is hit hard by the pandemic of COVID-19, the investment in private company is halted, and the supply and demand of materials that are not of daily use was completely halted. Not only this, in the initial stage the necessary items were at halt with a short notice by Indian Prime Minister and immediately necessary steps were taken to lower the spread of this virus starting from JANTA CURFEW and the slogan ‘JAAN HAI TO JAHAN HAI’ and was it important to pull the movement within the country but on the other side, the economy of India was also impacted facing the worst recession and thus expecting the negative growth in 2021.

This virus also led the complete halt in supply from other foreign countries and it seems like this will continue for another year. This pandemic brought a push to the PM’s motive of ‘MAKE IN INDIA’. Various companies started making important items that were purchased from outer India in higher rates and thus is a good time to be self-dependent.

Later, after three months of lockdown, the slogan ‘JAAN BHI, JAHAN BHI’ was initiated to start taking steps for the economy. There were various steps taken by the Central & State Government and Reserve Bank of India to recover the lost economy in which slashing of repo rate is a finest step and is crucial to stabilize economy in less span of time. This is a gem that will definitely give boost in the flow of money because loans on securities can be taken in less amount of interest and thus improvising the domestic market performance, exports and imports and also providing relief on service of debt and a much better working capital and a ease on removing constrained faced by government.

CONCLUSION

The corona virus 2019 is such a pandemic in which life and economy are both in risk. To deal with such pandemic, state and central government as well as RBI came with different reliefs for stabilizing various losses. Slashing of Repo Rate is a big step that will be a backbone in every sector and would give a push in a halt economy and life of the people in our country. In the coming few years it is expected that all such losses and the improved version of India will be seen.