Why in news?
- The Reserve Bank of India (RBI) further reduced the key interest rate or the repo rate by 40 bps on 22nd May 2020 after the Monetary Policy Committee (MPC) meeting as the COVID-19 pandemic induced lockdown continues.
- The Reserve Bank of India (RBI) has extended the moratorium on repayment for term loans by another three months till August 31, All other conditions for the facility remain unchanged.
Details of the Monetary Policy Changes
- The six-member MPC announcement has reduced the repo rate to 4%.
- The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
- All conditions for the Loan Moratorium facility remain unchanged.
- In view of the extension of the lockdown and continuing disruptions on account of COVID-19, it has been decided to permit lending institutions to extend the moratorium on term loan instalments by another three months, i.e., from June 1, 2020 to August 31, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by another three months.
- Also, to alleviate difficulties being faced by exporters in their production and realisation cycles, it has been decided to increase the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to 15 months, for disbursements made up to July 31, 2020.
Background to what was done before:
- In end March, the regulator announced the moratorium for a three-month period — March 1 to May 25.
- In a move to ease financial stress and to maintain adequate liquidity in the system, the Reserve Bank of India had announced several steps on 17th April 2020 including targeted long–term repo operations.
Highlights: Demand collapse
- Domestic economic activity has been impacted severely by the two-month lockdown.
- The top six industrialised States that account for about 60% of industrial output are largely in red or orange zones.
- High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments.
- The MPC is of the view that headline inflation may remain firm in the first half of 2020-21, but should ease in the second half, aided also by favourable base effects.
What is Repo?
- A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities.
- In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.
- That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital.
- They are also a common tool of central bank open market operations.
- For the party selling the security and agreeing to repurchase it in the future, it is a repo; for the party on the other end of the transaction, buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.
Monetary Policy Committee (MPC)
- The Monetary Policy Committee of India is responsible for fixing the benchmark interest rate in India.
- The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
- The committee comprises six members – three officials of the Reserve Bank of India and three external members nominated by the Government of India.
- They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”.
- The Governor of Reserve Bank of India is the chairperson ex officio of the committee.
- The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC which will bring more transparency and accountability in fixing India’s Monetary Policy.
- The monetary policy are published after every meeting with each member explaining his opinions.
- The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
- Key decisions pertaining to benchmark interest rates used to be taken by the Governor of Reserve Bank of India alone prior to the establishment of the committee.
- The Governor of RBI is appointed and can be disqualified by the Government anytime.
-Source: The Hindu