Today, India and the whole world is fighting with the coronavirus outbreak, and amid this situation for maintaining the economic growth an economy requires more than just rate cuts from the Reserve Bank of India in these trying times. On August 6th the central bank’s monetary policy committee (MPC) left the repo and reverse repo rate unchanged and yet the market reacted positively. The MPC keeps the repo rate and reverse repo rate at and 4 and 3.35 % respectively.
The stock market for some reason is obsessing less over policy rate and focusing more about the measures being taken by the RBI. Liquidity is considered as an important aspect of the market, indeed but there are other methods to introduce liquidity also. Markets are taking comfort from the fact that liquidity situation has improved significantly. India’s macro-economic indicator continues to flash the distress signal, the RBI picked inflation over growth, leaving the rates unchanged but also offering a lot more.
Restructuring of loans for MSMEs and the resolution framework are the biggest steps taken for the covid-19 related stress. Additional special liquidity facility of Rs. 5000 crore each for the National Agriculture and Rural Development (NABARD) and National housing bank (NHB) and allowing more borrowings against gold ornaments and jewelry showed the RBI’s intent to combat the impact of the viral outbreak. Deepthi Mary Mathew, Economist at Geojit Financial services said that the RBI acted judiciously by keeping the rates unchanged. “One of the major announcements was with regard to raising LTV (loan-value ratio) for gold from 75 percent to 90 percent. This would be beneficial to the Indian households in the wake of rising gold prices,” Mathew said.
In a normal situation, a rate cut would boost the economy, but we are living in a pandemic situation right now and thus a rate cut has been a non-event as the Central bank had already lowered rates significantly this year and is keeping room for exigencies. Vinod Nair, Head of Research at Geojit Financial Services said, “There were not many expectations regarding rate cut and hope was regarding a stoppage of moratorium and restructuring of loans. The RBI has acted judiciously by keeping rates unchanged due to surplus liquidity in the system and elevated forecast for inflation in Q2FY21.”
High Non-performing assets (NPA), or bad loans are a big concern for the banking industry. The decision on rates and steps to ease the coronavirus distress while shoring up the economy has to work in tandem for a better impact. Rates remain important but as the coronavirus redefines “normal”, the market, too, expects more than the ordinary from the central bank.
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