RBI slashes repo rate and announces a series of measures in its advanced MPC meeting

A cut in policy repo rate, an extension of the moratorium on loans by another three months, [taking the total period of applicability of the measures to six months (i.e. from March 1, 2020, to August 31, 2020)], relief for corporates by permitting lenders to convert the accumulated interest on working capital facilities over the total deferment period of 6 months (i.e. March 1, 2020, up to August 31, 2020) into a funded interest term loan (FITL) which shall be fully repaid during the course of the current financial year, ending March 31, 2021, and increase in group exposure limit of banks is being increased from 25 percent to 30 percent of eligible capital base,  are key measures announced by the RBI to tackle the ongoing pandemic crisis. The lending institutions are being permitted to restore the margins for working capital to their original levels by March 31, 2021. Similarly, the measures pertaining to reassessment of working capital cycle are being extended up to March 31, 2021

Today (May 22, 2020), the Monetary Policy Committee (MPC) advance its meeting scheduled for June 3 to 5, 2020, and announced the slashing of all the key policy rates from immediate effect. As announced in today’s Monetary Policy Statement, 2020-21, it was decided to reduce the policy Repo rate under the Liquidity Adjustment Facility (LAF) by 40 basis points from 4.40 percent to 4.00 percent and the Reverse Repo rate under the LAF stands adjusted to 3.35 percent with immediate effect. The Marginal Standing Facility (MSF) rate stands adjusted from 4.65 percent to 4.25 percent with immediate effect.

Consequently, all key policy rates with effect from May 22, 2020 are as under:

All other terms and conditions of the extant LAF Scheme will remain unchanged.

Assessment:

In its assessment of domestic outlook, MPC said, “From the incomplete data that have been made available, food inflation, which had eased from its January 2020 peak for the second successive month in March, suddenly reversed and surged to 8.6 percent in April as supply disruptions took their toll, immune to the ongoing demand compression. As per the statement, prices of vegetables, pulses, edible oils, milk, and cereals emerged as pressure points. Against this backdrop, the MPC assessed that the inflation outlook is highly uncertain and risks being gravest, the statement said. Further, it is stated that the inflation outlook has become complicated by the release of partial information on the consumer price index (CPI) by the National Statistical Office (NSO), obscuring a comprehensive assessment of the price situation, said.

Related post: