Announcement of key measures by RBI - A Brief Analysis
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Announcement of key measures by RBI - A Brief Analysis

Announcement of key measures by RBI - A Brief Analysis

posted on 2020-05-27 05:46:35 by Admin

Announcement of key measures by RBI - A Brief Analysis

So, what these policies mean to borrowers and the economy as a whole. Check out!

#1. Moratorium Extension

RBI has extended the loan moratorium until August to provide relief to the borrowers. This is the second moratorium period for 3 months from 01 June to 31 August. Lastly, RBI announced a moratorium from 01 March to 31 May for all term loans.

With the loss in jobs or pay-cuts, borrowers have been facing the challenge to pay their EMIs. The announcement is much relief to the borrowers who have been hit by the pandemic.

Analysis

With a total of 6 months moratorium from Match 01 to 31 August, borrowers now have the choice not to pay EMI during this period. This extension will help the borrowers whose salaries were impacted by the pay cuts or loss in jobs. This option does not impact the borrower's credit score.

Moratoriums are beneficial to borrowers who are facing liquidity crunch due to disruption in cash flow.

  • As moratorium is offered to provide relief to the borrowers, there will be no change in terms and conditions of the loan. Also, it will not lead to the downgrade of assets.
  • The moratorium period payments will not be considered as defaults.
  • No penal charges and impact on credit score.

 

Should Borrowers go for Moratorium?

Those borrowers who are availing extended moratorium will incur interest costs on the outstanding amount. Which will increase the overall interest on the loan. People with sufficient liquidity must continue to pay as per their original EMI schedule. So pleaserepay your credit cards o/s and don’t roll over as that’s approx 41% p.a. rate of interest. Also if you avail the moratorium some banks are not giving fresh loans to such customers.

Announcement

#2. RBI cuts Repo Rate and Reverse Repo Rate by 40 basis points each

RBI has reduced the Repo Rate, which is the interest rate at which RBI lends funds to the commercial banks. The rate has been reduced to 4% from 4.4%. The reverse repo rate at which commercial banks lend to RBI has also been reduced by 0.4%. The rate is now 3.35% from 3.75%.

Analysis

The main aim of the RBI to slash repo rates is to tackle the economic and financial stress. It will help to bring down market and lending rates. The combination of the moratorium and the reduced cost of funds may help to bring financial stability. Though what required is the risk averseness as there is enough liquidity in the banking sector. The benefits of additional liquidity remain debated. It is expected that with the weak GDP Growth, the RBI may ease the rates further to infuse liquidity in the economy.

#3. GDP Growth to Decline

Reserve Bank of India expects the Gross Domestic Products to decline this year. The impact of the pandemic is seen across industries due to disruption in economic activities. However, the RBI chief expressed confidence that economic activities will revive soon by the second half of this financial year.

Analysis

Though RBI has expressed a decline in the Gross Domestic Product (GDP), still there is no mention of the exact decline in the GDP. This reflects the complexity in projections with given growth models.

#4. Rs 15000 crore to EXIM Bank

RBI has allocated Rs 15000 crore to EXIM bank to support trade activities. The package will help the trade sector to revive after a slowdown due to pandemic restriction.

Analysis

With the allocation of funds, swap facility for EXIM banks, an extension of import payments, will provide stimulus to the trading activities. Also, the extension of exporter length of credit by 3 months from 1 year will help to ease the liquidity situation in export-import companies.

#5. 90 Days Extension to SIDBI

RBI has given the 90 days extension to Small Industries Development Bank of India (SIDBI) for the 90 days term loan. It will help to provide liquidity support to Micro, Small, and Medium Enterprises (MSMEs).

Analysis

The loan extension will help to boost the sentiments of small businesses. As now with the deflection in current cash flow, it will give time to MSMEs to structure their business. The benefit of the scheme will be realized further depending on the improvement in economic activity.

Other Statements Released by RBI

“The double whammy in terms of losses of both demand and production has, in turn, taken its toll on fiscal revenues”.

The investment has been declined by 36% in the capital goods production in the month of May. Along with the contraction of 27% in capital good imports in March and 5.5% in April.

Also, in the finished steel consumption, there is a fall of 91% and reduction of 25% in the cement production in March. The major decline has been seen in private consumption, which is 60% of domestic demand.

RBI also reported in the press release that the production of durables has fallen by 33% in March 2020 with a 16% decline in the output of non-durables.

“In the production sectors, industrial production shrank by close to 17%”

The manufacturing activity has been declined by 21% in the month of March.The output of core industries, which consist of40% of overall industrial production, decreasedby 6.5%.  The manufacturing PMI was reported 27.4 across all sectors with an all time low of 5.4 in April 2020.

Conclusion

The latest rates announced by RBI shall have a limited impact in the short term. Though it will revive the economy in the long run. The extension in the moratorium will put pressure in the bank books and can increase the financial burden on borrowers if the moratorium is not planned carefully. The other stimulus will help to boost the confidence to restart the economy in the new normal.