The mission of the Reserve Bank is to build confidence in the market and the economy in times of crisis. After a three-days long review meeting of the monetary policy the announcement by Governor of the Reserve Bank of India Shaktikant Das reflected the expectations of a central bank of a country.

The Reserve Bank of India has limitations on what can be done by the Central Bank of a developing country as it is impractical to print currency as some of the world’s major economies have done. Central banks in the US, Japan and Europe printed currency and marketed it during the post-COVID crisis. Such endeavour is not practical in a country like India.

The announcements made after the Monetary Policy Review meeting show that the Reserve Bank has done a lot in the current situation. Banks have not been put under much pressure but have taken balanced steps that can be adopted now. Shaktikant Das has said that the announcement to ensure liquidity will follow. This is a decision that will stimulate the economy and the market.

The Reserve Bank of India has decided to keep the repo rate and reverse repo rate unchanged. The current repo rate is four per cent. The repo rate was last reduced in May. It is not possible for the Reserve Bank to cut rates in the face of rising inflation. At present the inflation rate is 6.09 per cent. The Reserve Bank of India has adopted measures to control inflation between 2 per cent and 4 per cent. Therefore, it does not appear that the Reserve Bank will be prepared to cut rates further without reducing inflation.

Shaktikant Das said measures would be announced to increase liquidity, ease financial pressure and increase lending to the market. The announcement that medium and small micro enterprises will be given the opportunity to restructure their loans is an important one. The committee, headed by former ICICI Bank CEO K.V. Kamath, will recommend ways to restructure loans of companies. A special window will be opened for loan restructuring. This is a step towards sustainability for small and micro enterprises in crisis.

The earlier condition was that the gold loan should not exceed 75 per cent of the market value of the gold. The Reserve Bank has decided to increase this to 90 per cent. The aim of this decision is to help increase liquidity and credit to people faced with job losses and fall in income. This proposal will help in creating more funding through means such as gold loans, which are used by those who are facing job losses and income leakage. Since it is often impractical to sell gold at a high price, getting a loan of 90 per cent of the price of gold will allow households to use their gold for more financial transactions. The core of the Reserve Bank’s announcements today is to ultimately create more liquidity for companies and the general public, thereby reviving the market.

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The Reserve Bank of India (RBI), in its monetary policy committee (MPC) meeting on Thursday, has decided to keep its key lending rates (repo and reverse repo rates) unchanged.

The central bank decided to keep the repo rate at 4% and reverse repo rate at 3.35% mainly on inflation concern.

RBI fears, amid the COVID-19 crisis, the retail inflation in India, especially food inflation, may shoot up in this quarter (July-September period) due to supply disruptions, rural distress and poor economic recovery. Though policy makers paint a rosy picture on Kharif (monsoon) food production, retail inflation is likely to breach RBI’s target of 2% to 6%.

“RBI acted judiciously by keeping the rates unchanged. The surplus liquidity in the banking sector and expectation of inflation rate to remain at the elevated levels in Q2FY21 guided RBI’s decision. One of the major announcements was with regard to raising loan to value ratio (LTV) for gold from 75% to 90%. This would be beneficial to the Indian households in the wake of rising gold prices,” said Deepthi Mary Mathew, economist at Geojit Financial Services.

Though hailed as a deft move to infuse liquidity in the hands of ordinary people, RBI’s decision to raise LTV does not cover the Non-Banking Finance Companies (NBFC), which are playing a major role in the gold loan segment. A leading NBFC in Kerala, when contacted by The Gulf Indians, said they are waiting for clarity on the issue. “Only banks and regional rural banks are allowed to lend up to 90% of the gold value. We are awaiting clarification,” it said. Are they expecting a surge in additional gold loan demand as existing customers can borrow 15% more against their pledged assets? “We are not expecting a higher demand for additional/top-up loans from existing customers as gold is a very precious commodity and people will mortgage it only for the required amount. And they wish to take it back as early as possible,” said the NBFC company.

In the last seven months since February, the MPC has cut the repo rate by 115 basis points (bps). It is the rate at which RBI gives money to the banks. Reverse repo is the rate at which RBI accepts surplus/reserve cash from banks.

RBI Governor Shaktikanta Das also announced decision to extend resolution plan for COVID-affected retail borrowers. He has appointed a committee, headed by eminent banker K.V. Kamat, to suggest ways to implement the scheme. Earlier, moratorium on loan repayments was allowed till this month. Now the moratorium can be extended till December if the loan account is classified as standard and not in default.

“The central bank has preferred to play it safe with a pause even while reiterating that further space is available for more monetary action. The setting up of K.V. Kamat committee to advise on resolutions is an excellent decision,” V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, told The Gulf Indians.

The RBI governor said Rs.5,000 crore will be provided to National Housing Bank (NHB) and it will be for one year, to be charged at the repo rate. A loan resolution plan, which consists of payment moratorium of up to two years for corporate and personal borrowers, will also provide a breather to real estate developers and individuals.

“For the year 2020-21, as a whole, real GDP growth is expected to be negative. An early containment of the Covid-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks,” the MPC said in its statement.

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