RBI Monetary Policy: Brief overview

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COVID-19 outbreak caught the world off guard early in the financial year, businesses and the common man intently awaited for some good news – which came in the form of support and relief measures from the May 2020 Monetary Policy Committee (MPC) meeting.

A Monetary Policy Committee (MPC), setup in May 2016 and consisting of 6 members, conducts a meeting on the basis of the macroeconomic condition of the country and decides on matters that impact liquidity, consumption, and inflation.

The MPC consists of 3 internal members from RBI and other external members appointed by the Central Government. As per the RBI Act, 1934, the MPC is required to meet at least four times in a year.

In the first meeting for this financial year, the MPC brought down the repo rate by 40 basis points, which followed the reduction by 75 basis points in March 2020. In its second meeting for this financial year, the MPC unanimously voted and decided to leave the repo rate at its current rate i.e. 4% and the reverse repo rate at 3.35%, which was brought down from 3.75% in May 2020.

Presently, there are two routes under which foreign investment in defence can be made in India

  • The Moratorium – A five-month moratorium on loan payments, which was introduced earlier this year to reduce the stress of repayment on borrowers, will conclude on August 31, 2020. In its meeting in August, the MPC was silent on an extension of the moratorium on loan repayments. The ambiguity in the MPCs stance leaves this to the discretion of banks. It is likely that borrowers will have to resume loan payments from September 01, 2020 as banks will focus on to preventing loans from slipping into nonperforming assets.
  • MSMEs and Startups – Challenges and Relief Possibly, the worst affected from the COVID-19 outbreak was the Micro Small and Medium Enterprise (MSME) sector in India. A heightened sense of uncertainty lingered around the ability of these borrowers to eventually repay their debts.While the earlier moratorium meant that interest would be added back to principal, restructuring could mean either rescheduling or extending the payments, lowering interest rates, or altering any other terms that would favour the borrower. The moratorium served as an interim relief measure along with multiple COVID-19 relief measures announced by the Government. Such facility will only be available to borrowers whose aggregate exposure, including non-fund based facilities, is within INR 25 crore The one-time restructuring may be invoked at any time before December 31, 2020 and must be implemented within 90 days in case of personal loans and within 180 days in case of corporate loans. In addition to the loan restricting provision, Priority Sector Lending (PSL) guidelines have been reviewed. PSL status has been accorded to Start-ups, to support stability and growth; and the limits for renewable energy, including solar power and compressed bio-gas plants, are being increased. RBI and MPC’s support to the MSMEs and Start-ups should help navigate these entities through the existing crisis.

Relief measures are not only provided to individuals, Start-ups, and MSMEs, but also to larger businesses having higher exposures with lending institutions. The restructuring facility will also be provided to them on the condition that at the time of invocation of the resolution process a compulsory independent credit evaluation (ICE) by any one credit rating agency (CRA) will be required in respect of all accounts having aggregate exposure of INR 100 crore and upwards. Even though RBI has been attempting to provide financial stability to the economy since the pandemic has overtaken the world, the economic situation remains stressed. For the financial year 2020-21 as a whole, the growth in Gross Domestic Product (GDP) or simply put, the total value of goods and services produced in the country is expected to be negative.

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