RBI fights back: Shaktikanta Das wages war on coronavirus-led economic crisis

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Published: March 27, 2020 6:18:12 PM

RBI Governor Shaktikanta Das answers if a recession is underway, outlook on inflation, the significance of previous GDP estimates, other questions.

RBI, repo rate, liquidity funds, shaktikanta das, rbi governor, reserve bank of india, rbi mpcWhile the MPC cut repo rate by 75 basis points to make loans cheaper, it has also allowed a three months moratorium on retail loans.

After Finance Minister Nirmala Sitharaman announced a mega economic relief package, RBI Governor Shaktikanta Das took a step forward to introduce measures to give further relief to businesses, banks, as well as the common man. While the Monetary Policy Committee cut repo rate by 75 basis points to make loans cheaper, it has also allowed a three months moratorium on retail loans. Deferring the EMIs of retail loans, the move is likely to leave more cash in the hands of people, helping them to survive through the impact of coronavirus. RBI said that today’s measures were aimed at mitigating the negative effects of the virus, reviving growth, and preserving financial stability. 

The RBI today appeared to be in a mission mode while releasing the measures, as it only concentrated on how to protect the economy against an invisible assassin. In other major announcements, the Reserve Bank has also cut the Cash Reserve Ratio (CRR) by 100 basis points to 3 per cent. This move is intended to make banks lend more to circulate in the system, instead of stacking it. “CRR earned nothing and now will begin to earn a commercial return for the banks as well as allow them to manage the delay in cash flows from the moratorium,” said Jaspal Bindra, Chairman, Centrum Group. 

Why today’s repo rate cut is more important than previous cuts?

“Even with the external benchmark linked loans, the difference in interest rate, in comparison with the MCLR was only 15-20 basis points previously but with today’s cut, this difference will rise to 80-100 basis points, depending on banks,” Sameer Narang, Chief Economist, Bank of Baroda, told Financial Express Online. If the households now go for external benchmark linked loans, they will save a significant amount of money, he added. 

However, after the RBI’s announcement, various banks will play an important role to bring out the desired results. A common complaint against the banks in recent days has been about the slow transmission of the benefits announced by the government and the RBI. “The big question that remains unanswered is what it will take for banks enjoying substantial liquidity to extend credit to the needy sectors,” Jaspal Bindra added.   

Will retail prices rise amid lockdown and major disruption in businesses?

Heightened volatility in financial markets could also have a bearing on inflation. “Given this heightened volatility, unprecedented uncertainty and extremely fluid state of affairs, projections of growth and inflation would be heavily contingent on the intensity, spread and duration of COVID-19,” Shaktikanta Das said in his speech. Due to the above reasons, the Reserve Bank did not give any outlook on inflation. 

Is a recession underway?

Shaktikanta Das said that the expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed and the outlook is now heavily contingent upon the intensity, spread, and duration of the pandemic. Hence, there is a rising probability that large parts of the global economy will slip into recession.

Are previous GDP estimates still realistic?

Addressing the press conference, the RBI Governor made it clear that the previous estimates of GDP will no longer be realistic. The implied real GDP growth of 4.7 per cent for Q4 FY20 in the second advance estimates of NSO, within the annual estimate of 5 per cent for the year as a whole is now at risk from the pandemic’s impact on the economy, he added. Down the line, most sectors of the economy are expected to be adversely impacted by coronavirus. 

Meanwhile, the RBI’s relief measures have come after the finance minister yesterday announced a Rs 1.7 lakh cr stimulus to help the economy tide over the current crisis. FM Sitharaman has announced an economic relief package, that includes food security measures, direct cash transfers targeted at lower-income groups, monetary help to pensioners, widows and specially-abled, free gas cylinders, etc. 

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