India Monetary Policy April 2020

India: Reserve Bank of India governor announces unscheduled easing measures

In an unscheduled press conference on 17 April, Reserve Bank of India (RBI) Governor Shaktikanta Das announced additional monetary policy easing to mitigate the economic consequences of the coronavirus pandemic and ongoing national lockdown, adding to the easing measures the RBI introduced at its last monetary policy meeting on 27 March.

The governor announced that the reverse repo rate, which is the rate at which banks are paid for depositing cash at the RBI, will be cut to 3.75% from 4.00%. Meanwhile, two other key interest rates were left unchanged: The repo rate, which is what the RBI charges banks for borrowing from it, was left at 4.40%, and the marginal standing facility rate, which is what the RBI charges bank for borrowing from it at times of tight liquidity, was left at 4.65%. In effect, the RBI is further incentivizing bank lending.

In addition, the governor announced a raft of less conventional measures to encourage lending, including a targeted long-term repo operation initially worth INR 500 billion (USD 6.5 billion) to support liquidity for small- and medium-sized non-bank finance companies; a temporary cut to the liquidity coverage ratio to 80% from 100%, meaning banks have to hold less liquid assets to cover short-term obligations; and a three-month extension to a loan repayment moratorium. The RBI previously announced the cash reserve ratio, which is the share of deposits that banks have to deposit at the RBI, would be cut to 3.00% from 4.00%.

Commenting on the scale of the RBI’s stimulus, Prakash Sakpal of ING said: “Today’s liquidity-boosting measures of INR 1 trillion combined with those worth INR 3.74 trillion announced on 27 March amount to about 2.4% of GDP monetary stimulus so far.” Sakpal said this, combined with new expansionary fiscal policy, “still doesn’t put India among the ranks of the more aggressive, 10-20% of GDP, aggregate policy thrusts seen elsewhere in Asia”.

Assessing the effectiveness of the stimulus, Sakpal said: “We don’t consider [this] economic stimulus as strong enough to position the economy for a speedy recovery once the pandemic ends. Stretched public finances have constrained fiscal stimulus and this has forced the RBI to do all the heavy lifting.” He added: “Liquidity-boosting efforts may not be much help to corporate and household cash flows, at least not until confidence returns.”

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