Maintaining status quo & key additional measures: RBI Policy

The Reserve Bank of India (RBI) kept the repo rate unchanged at 4% in its bi-monthly monetary policy, as widely expected. The central bank has reduced the repo rate by a total of 115 basis points since February amid pandemic.

The monetary policy committee (MPC) decided to continue with the ‘accommodative’ stance as long as it is necessary to revive growth, mitigate the impact of COVID-19 while ensuring that inflation remains within the target going forward.

The accommodative stance is an attempt to loosen the money supply & make borrowing easy. The stance surpasses the possibility of rate hikes for the time period.

Status quo

These decisions are in consonance with the objective to achieve the medium-term inflation target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth, the statement said.

A reason to not let interest rates fall below the inflation target is to avoid high inflation and maintain price stability. Rates below the inflation target would also mean that saving depositors would be earning less in interests for their deposits and pay more outside for the prices i.e., inflation.

Additional measures

The RBI Governor Shaktikanta Das also announced additional developmental and regulatory policy measures to ease financial stress caused by COVID-19 disruptions.

• The RBI has allowed a one-time restructuring of loans without classifying them as NPAs to help companies and individuals manage the financial stress caused by the COVID-19 outbreak.
• A separate framework with respect to personal loans stressed due to pandemic has been proposed by the central bank. The resolution plans may include rescheduling of payments, conversion of any interest accrued into another credit facility, or, granting of the moratorium, based income streams assessment of the borrowers’ accounts that are classified as standard.
• The central bank has decided to allow MSMEs to restructure their debt, provided their accounts with the lenders was classified as standard as on March 1, 2020. ‘This restructuring will have to be implemented by March 31, 2021,’ said the governor.
• Banks can lend up to 90% of the value of gold as compared to 75% allowed earlier. This relaxation will be available only till March 31, 2021. This means that more can be borrowed against gold jewellery and ornaments from banks.
• An innovation hub will be set-up to create innovative and viable financial products or services to help achieve the wider objectives of deepening financial inclusion, efficient banking services, and such.

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