Repo rate cut during country’s moratorium period

The Reserve Bank of India today cut the repo rate by 40 basis points to 4%. Loan moratorium is also extended by another three months. The Central Bank governor Mr. Shaktikanta Das on 22.05.2020 announced several measures to revive the economy. Mr. Das said that the top six industrialised states that account for about 60 per cent of industrial output are in red zones or orange zones. Repo rate cut during country’s moratorium period will be helpful for economic growth in the upcoming times

 

RBI’s announcement on basic key points:

 

  • Repo rate: The repo rate is one of the tools for maintaining liquidity in the market. The Reserve Bank of India cut the repo rate by 40 basis points to 4%. This is the second repo rate cut after coronavirus lockdown. The reverse repo rate is reduced to 3.35% from 3.75%. The rate cut will release the pressure of corporate as well as retail borrowers. These deductions will also help RBI to manage the huge government borrowing programme coming up in next ten months of FY21.

 

  • Loan Moratorium: The Reserve Bank of India today extended the period of moratorium on loan by another three months until August 31. RBI had allowed moratorium on payment of all term loans due between March 1, 2002 and May 21, 2020

 

Now the total deferment period is of 6 months i.e. March 1, 2020 up to August 31, 2020. Reserve Bank of India has also allowed the lending institution to convert the accumulated interest on Working capital over the total deferment period into a funded interest term loan (FITL). The amount under FITL should be paid during the current financial year ending March 31, 2021

 

Case Study- Suppose the amount outstanding in the loan account of Mr. A is Rs. 10,00,000/-. The accumulated interest on Working Capital from the period March 1, 2020 up to August 31, 2020 is Rs. 1,00,000/-. Then RBI allowed the bank to convert this interest i.e. Rs. 1,00,000/- to FITL on the demand of the borrower. Another account will be opened under FITL and Rs. 1,00,000/- will be transferred to that account. As RBI said this amount should be paid before the year ends i.e. March 31, 2021. So the Bank will provide the time period for payment of this amount of Rs. 1,00,000/-. A FITL account will act like a normal account and the amount in this account will be paid with interest to the bank. This will reduce the burden of borrowers to repay the whole interest amount at one time.

 

 

  • GDP Factor: India’s GDP growth rate has been reduced at a tremendous rate. Coronavirus lockdown since two month has severely affected the revenue. The biggest blow to the economy came from the less consumption of commodities. Production of consumer durables reduced to 33% in March. Contraction of the service sector, commercial vehicle sales, domestic and international flights dump down the economy. The growth of India’s GDP in 2019-20 is estimated at 5 per cent. As per IMF’s World Economic Outlook, global growth is expected to contract sharply by 3 per cent in 2020-21. This may lead to reduction in the country’s overall GDP growth. The intensity and sharpness of COVID-19 pandemic will now determine the country’s economic growth.

 

 

  • Inflation: The Reserve Bank of India governor Mr. Shaktikanta Das said that inflation is highly uncertain amidst coronavirus lockdown. By the end of third and fourth quarter it is expected to fall below 4%. The impact of COVID-19 is becoming more severe than anticipated earlier.

 

There are not many savings in the market to invest in government securities. The corporate sector does not have much income to invest due to the impact of coronavirus lockdown.  But due to excess borrowing of central and states there will be excess supply of funds. In these circumstances RBI has to ensure that both of them borrow at a lower rate. The borrowing of states which was estimated earlier to be Rs. 6.41 lakh crore in 2020-21. But now it has been enhanced to 10.69 lakh crore.

The repo rate is one of the tools to reduce the overall interest rate in the economy. The Reserve Bank of India has cut down the repo rate so that the government can borrow at a lower rate. It is also buying longer term government securities to infuse liquidity in the market.

 

With this rate cut customers are expecting the lower rate of interest in car loan, home loan, personal loan, etc.

Case Study: Suppose Mr. A has taken the home loan of Rs. 60 lakhs for 25 years at an interest rate of 7.65 per cent. The EMI at this terms will be Rs. 44,927/-. If a bank lowers its interest rate by 40 basis points i.e. 0.4 % then EMI will be Rs. 43,368/-. There will be a total saving of Rs. 1,559/-. This means that higher the amount of loan more will be savings

 

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