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Monetary Policy Review- March 2020

Monetary Policy Committee (MPC) presented the monetary policy review in wake of COVID 19 pandemic on March 27,2020. This monetary policy review was very important due to current health emergency and economics situation of country due to coronavirus pandemic.

Overall objective of monetary policy for March 2020 is to:

  1. Mitigate the negative effects of COVID 19 virus
  2. Revive economic growth
  3. Preserve financial stability

Key focus in current Monetary Policy review

  1. Measures to expand liquidity in the system
  2. Steps to reinforce monetary transmission so that bank credit flows on easier terms
  3. Efforts to ease financial stress caused by COVID-19 disruptions by relaxing repayment pressures and improving access to working capital; and
  4. Endeavor to improve the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic.

Key highlights of monetary policy review

  • Repo rate reduction by 75 basis points to 4.4 per cent
  • Accommodative stance of monetary policy maintained
  • Fixed rate reverse repo rate reduced by 90 basis points to 4 per cent. This will help in making banks to use funds for lending to productive sectors instead of depositing with RBI. Point to note here is that banks have been parking their deposits funds close to Rs 3 lac crores on daily basis with RBI, even though growth of credit has been steadily slowing down.
  • Marginal standing facility (MSF) rate and the Bank Rate changed to 4.65 per cent from 5.40 per cent
  • a cumulative reduction in the policy repo rate of 135 basis points
  • MPC refrained from giving GDP growth and inflation numbers. This is due to high volatility, and uncertainty in market due to COVID19.
  • Existing policy rate corridor has been widen from 50 bps to 65 bps. Under the new corridor, the reverse repo rate under the liquidity adjustment facility (LAF) would be 40 bps lower than the policy repo rate. The marginal standing facility (MSF) rate would continue to be 25 bps above the policy repo rate.
  • Accommodation under the marginal standing facility (MSF) is increased from 2 per cent of the statutory liquidity ratio (SLR) to 3 per cent with immediate effect. This measure will be applicable up to June 30, 2020.
  • Cash reserve ratio (CRR) of all banks is reduced by 100 basis points to 3.0 per cent of net demand and time liabilities (NDTL) for a period of one year.
  • Minimum daily CRR balance maintenance is reduced from 90 per cent to 80 per cent. This a one-time dispensation available up to June 26, 2020.

See also: What is repo rate?

Other key decisions with respect to policy instruments

  • The Net Stable Funding Ratio (NSFR), which reduces funding risk by requiring banks to fund their activities with sufficiently stable sources of funding over a time horizon of a year in order to mitigate the risk of future funding stress. Its implementation is postponed by 6 months now.
  • The capital conservation buffer (CCB) is designed to ensure that banks build up capital buffers during normal times (i.e., outside periods of stress) which can be drawn down as losses are incurred during a stressed period. Last tranche of 0.625 percent is deferred by 6 months.
  • Indian banks which operate International Financial Services Centre (IFSC) Banking Units (IBUs) are being allowed to participate in the NDF(Non Derivable Forwards) market with effect from June 1, 2020
  • exemption on incremental credit disbursed by banks between January 31 – July 31, 2020 on retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) from the maintenance of cash reserve ratio (CRR).
  • Reserve Bank will conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to ₹ 1,00,000 crore at a floating rate, linked to the policy repo rate. Liquidity availed under the scheme by banks has to be deployed in investment grade corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds. Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.

Updates regarding existing debts

  1. Moratorium of three months on payment of installments in respect of all term loans. This is applicable to all commercial banks(including regional rural banks), cooperative banks and NBFCs
  2. Deferment of three months on payment of interest in respect of working capital facilities sanctioned like cash credit/overdraft
  3. The moratorium on term loans and the deferring of interest payments on working capital will not result in asset classification downgrade.
  4. In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are allowed to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes will not result in asset classification downgrade.
  5. The moratorium on term loans, the deferring of interest payments on working capital and the easing of working capital financing will not qualify as a default
  6. There will be no adverse impact on the credit history of the beneficiaries

End note

Since the last MPC meeting of February 2020, the Reserve Bank has injected liquidity of ₹ 2.8 lakh crore through various instruments, equivalent to 1.4 per cent of our GDP. Together with the measures announced today, RBI’s liquidity injection works out to about 3.2 per cent of GDP.

See full report on Monetary policy on RBI website

As we have seen, sole aim of this monetary policy review was to lower the impact of COVID19 pandemic and to increase liquidity in market.

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