RBI’s Measures to Inject Liquidity

RBI Governor Shaktikant Das addressed the nation on 17th April and announced a plethora of measures to boost liquidity in the country and assist India Inc to restart functioning.
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Crux of the Matter

Assessment of the Economic Situation
While assessing the current economic situation, Das said that the International Monetary Fund (IMF) has projected India’s growth in the coming fiscal to drop to 1.9% – the highest among G20 nations. He added that the World Trade Organisation expects global trade to fall by 13-32% in 2020. On the domestic front, India’s Kharif crop production was up by 37% as compared to last year. Even, the Meteorological dept forecasted a normal monsoon.

Manufacturing Purchasing Managers’ Index (PMI) in March was at 4 months low after the February industrial output accelerated to be at 7 months high. India’s exports reduced by a massive 34.6%, However, foreign exchange reserves were standing strong at $476.5 billion as of April 10, 2020. ATMs operated at 91% capacity. RBI had injected fresh currency of ₹1.2 lakhs since March 1. RBI also conducted a targeted long term repo operation (TLTRO) to inject about ₹75,000 crores in the economy.

Step II Measures
Das announced fresh measures to maintain liquidity in the economy – ensuring enough cash is available to the consumers; ease the financial stress caused because of the halted economy; to grease the market before it begins normal functioning; and incentivise bank credit flows.

  • Firstly to inject liquidity, RBI announced Targeted Long Term Repo Operations (TLTRO) 2.0 worth ₹50,000 crores.
  • Financial Institutions that provide finance to agriculture and small business will receive refinancing funds.
  • National Bank for Agriculture and Rural Development (NABARD) would receive ₹25,000 crores to refinance Regional Rural Banks (RRBs); Small Industries Development Bank of India (SIDBI) to get ₹15,000 crores; National Housing Bank (NHB) to get ₹10,000 crores to assist housing finance institutions.
  • Reverse Repo Rate reduced by 25 basis points (0.25%) to 3.75%. This would incentivize banks to lend more, creating more credit in the economy.

Regulatory Measures

  • The 90-day norm for categorizing Non-Performing Assets (NPAs) in banks will exclude the moratorium period granted by banks.
  • All scheduled commercial banks and cooperative banks shall not make dividend payments until further notice.
  • Liquidity Coverage Ratio (LCR) of banks is reduced from 100% to 80%, so as to allow banks to lend more. It will be restored to 90% on 1st October 2020, and 100% on 1st April 2021.

Das expects the Indian economy to show a sharp turnaround and return to pre-COVID and pre-slowdown projection for 2021-22 fiscal – growth at 7.4%.

  • Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument that can be used to control the money supply in the country.
  • Decreasing Reverse Repo means commercial banks will now earn less when they put their liquid cash with RBI and as a result, they will invest or lend this liquid cash to other places which should result in more liquidity in the economy.
  • Other than reverse repo rate, other instruments that can be used to adjust liquidity in an economy are adjustment of Cash Reserve Ratio (CRR) or buyback of government securities (Open Market Operations).
  • In order to keep the economy cash-rich, the government is also going to refund pending Income Tax and GST refunds amounting up to ₹5 lakhs. 14 lakh taxpayers will benefit from it.