Here is how the new RBI steps will impact the common man including borrowers, depositors and businessmen.
The Monetary Policy Committee ( MPC) of the Reserve Bank of India (RBI) in an off-cycle meeting decided to cut the repo rate by 40 basis points (bps) to 4 per cent while the reverse repo rate was reduced simultaneously to 3.35 per cent. Prior to this, the RBI Governor held two pressers on March 27 and April 17, where it cut its repo rate to 4.4 per cent and reverse repo rate to 3.75 per cent. The RBI also decided to extend the moratorium on all term loans by another 3 months to provide relief to borrowers whose income has been hit due to the lockdown. The loan moratorium has now been extended till August 31.
Here is how the new steps by RBI impact the common man including borrowers, depositors and businessmen:
1. Impact on Deposit Rate and Small Saving rates – With the latest repo rate cut, the deposit rates of the banks may come down further. The same story plays out with small savings schemes whose interest rates are revised on a quarterly basis. Those investing in FDs, especially senior citizens who are mainly dependent on the interest income from these deposits, are likely to see a reduction in their income.
2. Loans will become Cheaper – The rate cut is expected to reduce EMIs (equated monthly instalments) of borrowers and also make it cheaper to take new loans. Now with the external benchmarking of floating rate loans from October 1, 2019 these loans compared to those linked to MCLR will become cheaper. So, for borrowers looking to take loans, they will get even more attractive rates.
3. Shorter end of the curve will generate lower yields – Those investors who invest in short duration paper in debt market like overnight fund will see fall in the return. Even the return of liquid funds can fall amidst flush of liquidity in the system.
4. Moratorium on Loan payment – RBI’s decision to further extend the moratorium on loan for the 3 months will ease the pressure on cash flows of the common people in a time when their income has fallen or is uncertain. However, this move along with the fear of rising NPAs, may put pressure on the banks’ balance sheet and cash flows.
5. Economic Activity to get a boost – These measures are designed to help businesses stay afloat till the time the situation improves and there is more clarity on the areas in which support is required. Once clarity emerges on the areas that need support and the extent of support required, the government can then provide targeted support. But it is important to ensure that the businesses survive till then.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy. The MPC is of the view that if CPI evolves as per the path there can be scope for further rate cuts. The MPC opined that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated and various sectors of the economy are experiencing acute stress.
On economic growth in the current fiscal, the RBI projected negative growth with a pickup in growth impulses in the second half. The MPC said that economic activity other than agriculture is likely to remain depressed in Q1, 2020-21 due to the extended lockdown. Recovery in economic activity is expected to begin in Q3 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives.
(By Bajaj Capital Research)