How RBI repo rate cut, loan moratorium will help economy; what Shaktikanta Das could have done more

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Published: May 22, 2020 1:10:35 PM

The repo rate cut may not lead to incremental loans immediately as now few people would want to or be able to either buy a house, a vehicle or anything of high value.

RBI, Reserve Bank of India, Shaktikanta Das, press conference, repo rate cut, moratorium extendedThe real estate sector waited for a one-time restructuring of loans.

RBI Governor Shaktikanta Das today announced a slew of monetary measures including an out-of-turn repo rate cut and allowing deferment of loan repayments, in order to support the economy amid weak activity. Shaktikanta Das addressed a press conference for the first time after Finance Nirmala Sitharaman detailed out the economic relief measures of Rs 21 lakh crore. Along with 40 basis points cut in the repo rate and a three months further extension to the moratorium period, steps to improve the functioning of the market, support exports, and imports, relief on debt servicing, easing the financial constraints of state governments, were also on the Reserve Bank’s cards today.

Repo rate cut: Is it enough?

While the further cut in the repo rate in today’s press conference is not expected to provide much relief in the near-term, it is believed to help the existing borrowers by reducing their EMI burden. “I think the other factors will have a bigger implication on the economy on an immediate basis. The repo rate cut may not immediately help, though in terms of easing the interest rates on consumers, it might,” Indranil Pan, Chief Economist, IDFC Bank, told Financial Express Online. The repo rate cut may not lead to incremental loans immediately as now few people would want to or be able to either buy a house, a vehicle or anything of high value. But it will definitely help existing borrowers who have taken loans after October 2019, Indranil Pan added. He also pointed out that the savings in the country are rising quicker than the credit.

Also Read: Reserve Bank of India surprises with 40 bps repo rate cut; Shaktikanta Das ‘worried’ over inflation

However, on the brighter side, some experts believe that the repo rate cut will help the banks infuse liquidity faster. There has been a total collapse in demand in both urban and rural India since March 2020. The continued proactive measures taken by the RBI will help address these issues and revive the economy in the second half of the year, said Niranjan Hiranandani – President – Assocham and NAREDCO. He also stated that reducing the repo rate by 40 basis points to 4 percent will help the banks provide additional liquidity access to all the sectors.

This is the second repo rate cut this year, after a 75 basis points cut in March and with today’s announcement India has come in-line with the rate cuts announced by developed economies like USA (150 bps) and UK (65 bps). It is also expected that RBI may go for another rate cut in the future. With the indication that the growth will be negative, we continue to see space for some further rate cut though the efficacy of rate cuts will progressively be lower, said Suvodeep Rakshit, Vice President and Senior Economist, Kotak Institutional Equities.

Also Read: Govt stimulus measures short of expectations; lockdown damage will make Indian economy shrink this year

Extension of loan moratorium

To ease financial stress, RBI Governor Shaktikanta Das extended the moratorium period on repayment of loans by another three months from June 1 to August 31 due to lockdown extension. Considering the economic activity levels, the moratorium extension was already expected. The step to extend the moratorium period has been welcomed by the industry and is being considered as a big respite for the borrowers during this challenging time. The extension of the moratorium and improved terms will provide a breather to industry and household borrowers alike, said Shishir Baijal, Chairman & Managing Director, Knight Frank India.

Unfulfilled expectation

The real estate sector is struggling through the coronavirus crisis and it expected some targeted relief to the sector in today’s address. In the previous announcement, RBI had introduced TLTRO 2.0 to give some relief to the real estate sector. It would have been a big respite if the long-standing real estate industry demand for a one-time restructuring of loans were allowed along with the measures announced today, Shishir Baijal added. 

Meanwhile, the RBI Governor Shaktikanta Das said that today’s announcement is made by keeping in mind the three important goals, which are, keeping the financial system sound, liquid and smoothly functioning; ensuring access to finance to those who tend to get excluded from the financial markets; and preserving the financial stability. However, the Reserve bank also said that this year’s GDP growth may contract, which has brought in front a worrisome picture of the overall economic front.

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