RBI Governor’s Statement – Monetary Policy Statement, 2020-21: Resolution of the Monetary Policy Committee (MPC) May 20 to 22, 2020

RBI Governor Shri Shaktikanta Das addressed a press conference on 22nd May 2020 where in he informed that in view of the recent release of Macro Economic Data the RBI preponed the need for an off-cycle meeting of the monetary policy committee (MPC) in lieu of the scheduled meeting to be held during June 3 to 5, 2020. The MPC met on 20th, 21st and 22nd May 2020. The MPC reviewed domestic and global developments and their implications for the outlook. MPC voted unanimously for a 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. On the quantum of reduction, the MPC voted with a 5-1 majority to reduce the policy rate by 40 basis points from 4.4 per cent to 4.0 per cent. That marked the second cut in the repo rate - or the key interest rate at which the RBI lends short-term funds to commercial banks - so far this year. Consequently, the Marginal Standing Facility (MSF) rate and the Bank rate stand reduced to 4.25% from 4.65%. The reverse repo rate stands reduced to 3.35% from 3.75%.

Following are highlights of RBI Governor Shaktikanta Das Monetary Policy Briefings:

  • COVID-19 macroeconomic impact turning out to be more severe than initially anticipated by Monetary Policy Committee
  • COVID-19 has crippled global economy
  • It has stalled economic activity across the globe
  • Repo rate reduced by 40 basis points
  • Now repo rate is 4%, from 4.4% earlier
  • Reverse repo rate also stands reduced by 40 basis points (0.40 percentage point) to 3.35%
  • Monetary Policy Committee voted 5:1 in favour of rate reduction
  • RBI to maintain accommodative stance till economic growth revives
  • Moratorium on term loan instalments extended by another three months
    • Lending institutions to allow deferment of interest on working capital facilities till August .
  • Domestic economic activity impacted by lockdown; MPC judged risks to be gravest in growth outlook
  • Investment demand has declined
  • High frequency indicators point to collapse in demand beginning March
  • Acute stress in various sectors
  • Top six industrialised states accounting for about 60% of industrial output largely in red or orange zones
  • Government revenue has been impacted severely
  • Contraction of 27% in capital goods import in March
  • Private consumption has seen biggest blow due to COVID-19
  • Agriculture activities however have provided hope
  • Forecast of normal monsoon offers ray of hope
  • Headline inflation may firm in first half of 2020, but ease afterwards
    • MPC's forward guidance directional
  • Inflation to fall below 4% in Q3, Q4; inflation outlook highly uncertain
  • Combination of fiscal, monetary, administrative measures to create conditions for gradual economic revival
  • GDP growth in 2020-21 expected to remain in negative territory
  • Uncertainties on COVID-19 remain
  • ADDITIONAL MEASURES IN FOUR AREAS:
    • To Improve Market
    • To Support Trade
    • To Ease Financial Stress
    • To Ease Financial Constraints Faced By State Governments
  • Extension in time given to importers for remittances from six months to 12 months, applicable to imports made before July 31
  • Line of credit of Rs 15,000 crore for EXIM Bank
  • Maximum permissible period of export credit increased to 15 months from 12 months

Key Takeaways from today's Monetary Policy:

Moratorium on payment of loans
The RBI extended the moratorium on payment of loans by another three months till August to provide much-needed relief to borrowers whose income has been hit due to the coronavirus crisis.
In March, the central bank had allowed a three-month moratorium on payment of all term loans due between March 1, 2020, and May 31, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, were shifted across the board by three months.
As a result of this moratorium, individuals' EMI repayments of loans taken were not deducted from their bank accounts, providing much-needed liquidity. The EMI payments will restart only once the moratorium time period expires on August 31.
The moratorium on interest on working capital was also extended by three months. Interest accumulated for the six-month moratorium period can be converted into a term loan. Further, bank exposure to corporates has been raised to 30 per cent of the group's net worth from the current limit of 25 per cent, a move that will allow lenders to give larger loans to companies.

GDP growth in 2020-21 likely to in negative

India's gross domestic product (GDP) growth will be in negative territory in 2020-21 as the outbreak of coronavirus has disrupted economic activities. The combined impact of demand compression and supply disruption will depress economic activity in the first half of the current fiscal.
"Assuming that economic activity gets restored in a phased manner in the second half of this year and taking in consideration favourable base effect, it is expected that combined fiscal, monetary and administrative measures currently undertaken by both the government and RBI create conditions for gradual revival of activities in the second half of 2020-21.
"GDP growth in 2020-21 is estimated to remain in the negative territory with some pick up in growth impulses in the second half of 2020-21 onwards," he said.

Inflation outlook highly uncertain

The Governor said the inflation outlook is highly uncertain due to the outbreak of the COVID-19 pandemic and expressed concern over elevated prices of pulses. Inflation forecasting has become complicated due to (poor) data collection. He also said there is a need to review import duties to moderate prices.

  • Outlook-Inflation highly uncertain and headline inflation in H1FY21 will stay intact but by Q3 and Q4 of the current fiscal it may fall below the target of 4% , according to the Governor. Further, he said government revenues have been impacted severely due to the slowdown in economic activity amid the pandemic.
  • Inflation- Food inflation surged in Apr'20 to 8.6% with vegetable, oilseeds, and milk being the pressure points.
  • Silver Lining- Agriculture and allied activities a hope from the normal south-west monsoons this year.

RBI hikes group exposure limit of banks to 30%, state borrowing rules relaxed:

Group exposure limit determines the maximum amount a bank can lend to one business house. This is done to prevent the troubles at entity having a spillover effect on the bank which could lead to a systemic risk. The RBI took the step today as various large business groups were finding it hard to raise money from banks in a tight money market, impacted by covid-19 crisis.
The group exposure limit of banks is raised to 30% from 25% for a temporary period till 30 June, 2021.

Other key takeaways:

  • RBI to roll over Rs 15,000-crore refinance facility for SIDBI for 90 days
  • RBI increases export credit period to 15 months from 1 year
  • RBI to extend Rs 15,000-cr line of credit to EXIM Banker
  • Industrial production shrank by close to 17 per cent in March with manufacturing activity down by 21 per cent
  • Output of core industries contracted by 6.5 per cent
  • Domestic Development- High frequency indicators saw huge collapse, both in rural and urban front. Merchandise exports plunged 60.3%, imports contracted by 58.6% (worst in many yrs) in Apr'20. Consumer durable production declined by 33% in Mar'20.

RBI measures, along with Centre’s stimulus, will revive growth:

Bankers have welcomed the latest round of measures by the Reserve Bank of India and said they will help revive growth, along with the recent stimulus measures by the Centre.

“The RBI policy announcement in response to the fallout of Covid pandemic is timely. Uncertainty associated with the pandemic, normalisation of economic activity, and relaxation made in social distance make it imperative that policy response is calibrated and swift,” said Rajnish Kumar, Chairman, State Bank of India and Indian Banks’ Association.

Support for economy

SBI CHairman further noted that the successive measures by the RBI and government indicate the desire to go full throttle to support the economy in the current unprecedented times.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank, said there has been a steep fall in consumption demand, combined with supply-side disruptions. “Together, it has led to a sharp decrease in economic growth. … Coming on the heels of the package announced by the Centre, the RBI announcements will help businesses restart. With a gradual lifting of the lockdown, it is now imperative to revive the economy,” she said.

Mandar Pitale, Head Treasury – SBM Bank India, said the accommodative stance by the central bank is a further indication that it will not shy away from changing the interest rates going ahead, depending on the data. “The Monetary Policy Committee opted for a not-so-large 40 basis points rate cut indicating calibrated approach basis underlying uncertainty on inflation outlook,” he said.

Sameer Narang, Chief Economist, Bank of Baroda, noted that since the pandemic, the RBI has reduced policy rate by 115 basis points, and since last year, rates have been lowered by 250 basis points.

“Recent trade and electricity data suggests large contraction due to lockdown and social distancing measures. We expect GDP to contract by 4.7 per cent in 2020-21 and CPI inflation at 3.5 per cent, which makes us believe that RBI has room for another 25 basis points reduction in policy rate,” he said.

"The measures would ease exporters' distress, but the problem is far greater, posing existential crisis for the sector. Exporters would need direct fiscal support for staying alive in business. These measures can be in the form of waiver of electricity-user charges, reduction of levies at the ports, freight support and wage support for workers," said Engineering Export Promotion Council Chairman Ravi Sehgal.

Other Reactions to RBI Governor Shaktikanta Das' announcements today

Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and Proptiger.com:

With a view to supporting the economy in general and real estate in particular in the wake of Covid-19, the government has in the recent past made a series of announcements. The RBI decision to further reduce the repo rate to 4% is a major step in that direction. The move will not only help developers but also homebuyers who have been under extreme pressure due to the prolonged lockdown which has impacted their income. This along with the move of extending loan moratorium for another six months will be extremely helpful in lowering the burden for those who are paying EMIs or using credit cards and lower financial stress. What needs to be seen is how quickly the banks reflect this change in their respective rates.

Ankit Kansal, MD & CEO, 360 Realtors:

The RBI measures to reduce the repo rate & reverse repo rate is in continuation of the govt. policies to build liquidity & enhance its circulation in the system. The Real Estate welcomes the prudent step. It will help in managing supply-side bottlenecks by providing better and easier credits to the developers. Likewise it will boost demand in the form of cheaper home loans. The timing is also apt as everywhere we can see the partial suspension of the lockdown and things are gradually coming back to normal. In such circumstances, a positive step like this can give further confidence & foster faster revival.

Prateek Mittal, Executive Director, Sushma Group:

We welcome this announcement by the RBI governor to reduce the repo rate by 40 bps to from 4.4% to 4%. Holding such a prominent position in in building the country’s economy, the realty sector will garner extensive benefits and the reduced repo rate will hugely support the buyer and boost the demand . Along with that the extended term loan moratorium period will provide the relief towards liquidity for developers to focus on faster execution of projects.

Uddhav Poddar, MD, Bhumika Group:

We welcome the further reduction of policy rates by 40 basis points announced today, with this round of reduction the lending rates are like to be at the lowest in 10-15 years. The extension of loan moratorium by another 3-months will help a vast majority of people tide through this period. However, we were expecting RBI to allow a one time restructuring of loans seeing the pain across sectors, and we hope to hear some announcement in that regard soon.

Harvinder Singh Sikka, MD, Sikka Group:

This time it is likely that banks will transmit the benefits to customers quickly as RBI is likely to keep a watch on it. In the current scenario it was important to take steps that can make the economy start recovering. The latest announcements indicate that RBI is likely to ease it’s monetary policy to financial system. Banks also should take a leaf out of this and extend loans to real estate sector, which in turn will play a role in the economy growth.

Vikas Bhasin, CMD, Saya Homes:

RBI on its part is showing seriousness towards the health of economy. Now we hope that banks should pass on the benefit to the buyers in quick time. The demand for homes will increase further as home loan interest rates will come down to a historic low. It is good news for the real estate sector.

Dhiraj Jain, Director, Mahagun Group:

After the latest announcement by the RBI we expect the demand to go up. The fence sitters will have no better time to buy then the current period. People have already assessed the importance of owning a home, which was clear from the bookings during the lockdown period. The government must now step forward and give relief package to the sector so that things move smoothly.

Please click on the following link for Governor's full Speech Governor’s Statement – May 22, 2020

Please click on the following link for Monetary Policy Statement 2020-21: Monetary Policy Statement, 2020-21: Resolution of the Monetary Policy Committee (MPC) May 20 to 22, 2020

Source: rbi.org.in . Economic Times, LiveMint, India Today, Business Standard, Business Line

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