The Reserve Bank of India has a list of RBI policy options to combat economic crisis cause from Coronavirus pandemic. We see the response of Reserve Bank of India through its various relief measures. It has cut the interest rates by 75 basis points. This results into the cash flow of $50 billion in the financial system. Imposing a moratorium on loan re-payment is a quick and most admirable decision.
Let us look at these 5 policy options to combat economic blow
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Rate Cuts
Reserve Bank of India is expected to make another repo rate cuts by 75 basis points. We saw the repo rate cuts by 75 basis points on 27th March, 2020 due to impact of COVID-19. These repo cuts will increase the liquidity in the market. When there is cuts in repo rate, bank borrows money from RBI at lower interest rates and in turn provides loan to customers at lower rates.
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Deficit financing
Reserve Bank of India may borrow government bonds to control the deficit cause due to corona outbreak. Deficit financing here means granting funds to finance the shortfall resulted from excess of expenditure over revenue. In recent days of April we saw a heavy bidding and sudden flow of funds into the government security market. There is prohibition to participate in direct auction of government bond by central bank but every limitation has an escape clause. Reserve bank will be allowed to directly participate in primary auction if fiscal deficit is expected to be 0.5% points above the targeted shortfall for the year
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Purchase of bonds
Reserve Bank of India conducts Open Market Operation to purchase bonds from the market. Central bank directly purchase bonds of large entities and lending NBFCs to boost liquidity in the market. These bonds are purchase to inject liquidity in the market which is required in a present scenario.
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Corporate debts
Many lower grade corporates and shadow lenders are finding hard to raise their business due to shortage of funds. Reserve Bank of India may buy corporate debts to provide liquidity injection which will ultimately boost our economy. Shadow lenders are the Non Banking Financial Institution where normal banking rules and regulations do not apply. These includes Securitization companies, insurance companies, mortgage lenders,etc.
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Moratorium rule
After releasing circular on 27th March,2020 RBI came out with some extra points on 17th April, 2020 in which it cleared that the 90-day NPA norm shall exclude the moratorium period i.e, After May 31, 2020 the period of 90 days will begin
That’s all for the 5 key RBI policy to combat economic crisis from Coronavirus pandemic. Thanks for visiting us !