At present, the Indian economy is estimated to be experiencing its worst slowdown in nearly a decade. The Advance Estimates of the National Statistical Office (NSO) projected the growth of the gross domestic product (GDP) to be 5% in 2019-20, while some even predicted it to be far lower. This is in stark contrast to the official growth rate of 8.2% in 2016-17 and is made more dramatic when comparing quarterly figures, falling from 8.1% in January-March 2018 to 4.5% in July-September 2019.

This economic slowdown has impacted not only businesses and consumers but essential fiscal policies across the country, not the least of which are determined by directives from the most prominent financial body in the country – the Reserve Bank of India (RBI). In fact, as a direct impact of the slowdown, the RBI had to lower its growth forecast of GDP for the year ending March 2020, from 6.1% to 5% .

Source: Bloomberg

Amidst the concerns about the weakening economy, however, the Reserve Bank of India has recently stepped up to take a more active and substantial role to re-stimulate economic growth in the country. Many of the RBI’s recent measures and policy announcements are being hailed by industry experts as “progressive” and “forward looking”.

To better understand the direction in which the Reserve Bank of India is heading in response to the economic slowdown, let us take a closer look at some of its most recent and prominent measures.

Policy Rates Remain Unchanged
In a largely safe move to keep the status quo, the Monetary Policy Committee (MPC) of the RBI voted unanimously to not cut policy rates and retain them unchanged at 5.5 per cent. The reverse repo rate also stays unchanged at 4.90 percent.[3].

To recap, policy rate, or repo rate is the rate at which commercial banks borrow funds from the Reserve Bank of India by selling their securities. By keeping its policy rates unchanged, the RBI has adopted an accommodative stance to support economic growth, as rate modification was deemed a non-priority. Instead, the RBI has opted to focus on checking the country’s headline inflation which has been deemed as ‘highly uncertain’.

Additional Read:- RBI Cuts Repo Rate by 75 bps to 4.40% to Fight Covid-19

Introduction of the LTRO
While a repo rate cut has been absent from the Reserve Bank of India’s recent policy, the financial body has nevertheless ensured that liquidity is improved in the banking system. This is being achieved by its introduction of the Long Term Repo Operations, or LTRO, from February 15 onwards.

Economic Slowdown data

Typically, loans that have higher maturity periods – such as 1 year or 3 years – are accompanied by higher interest rates as compared to short term, or repo loans. However, with the LTROs, the Central Bank can provide loans to commercial banks at a much cheaper rate, that is the current repo rate. These operations are guaranteed to bring down cost of funds for struggling banks and inject liquidity in the banking system by as much as Rs. 1 lakh crore [4]. Therefore, while limited by the inflation outlook to retain its repo rate, the RBI has managed to devise a creative method to ensure durable liquidity to the banking sector with the LTRO.

Other Significant Measures
Apart from these measures, the RBI has also sought to boost retail in the country by pushing for more active credit policies. Firstly, it has extended the one-time restructuring scheme for loans to MSMEs, which was to expire on March 31. The revised date has now been pushed till Dec. 31, 2020. According to the RBI, this move is set to help “eligible MSME entities that could not be restructured under the provisions of the circular dated January 1, 2019 and the MSME entities that have become stressed thereafter” [5]. In addition to this, the RBI has also provided a Date of Commencement of Commercial Operations (or DCCO) Extension for realty projects and a Cash Reserve Ratio (CRR) Exemption for incremental funding to banks.

Additional Read:- RBI Press Conference on Monetary Relief Measures in the Time of COVID-19: Key Takeaways

Measures such as these will not only help stimulate the economy but will also help uplift the position of the RBI as a body that fulfills goals greater than merely setting policy rates and meeting a pre-set macroeconomic target. This was also reiterated by the Governor of the Reserve Bank of India, Shaktikanta Das after a significant policy announcement made early last month. In a press conference, he stated that “It is important not to discount the RBI” and that “the central bank has several instruments at its command that it can deploy to address the challenges that the economy currently faces in terms of sluggishness in the growth momentum” [6]. With these assurances and initiatives by the Reserve Bank of India, the country’s economy certainly looks to be heading down a hopeful path. However, it is just as essential to nurture one’s personal and business finances and ensure that they stay protected from economic turmoil.

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