RBI Guidelines Avid COVID-19

What is RBI Monetary Policy 2020?

It is the policy formulated by the Reserve Bank of India in 2020 related to money matters of the country. The policy also takes into account the distribution of credit among users as well as the rate of interest on borrowing and lending. Since India is a developing country, the monetary policy is significant in the promotion of economic growth. The monetary policy in India is formulated by the Reserve Bank of India and relates to the monetary matters of the country. The policy involves measures taken to control inflation, regulate supply of money and cost of credit in the economy. The various instruments of monetary policy include variation in bank rates, other interest rates, supply of currency, etc.

On 27th March 2020, RBI has cut the Repo Rate by 75 bps to 4.40% from 5.15% earlier. Reverse Ratio has been cut by 90 bps to 4% and Cash Reverse Ratio (CRR) by 100 bps to 3%. This has been done to mitigate the impact of Covid-19. RBI has also announced that the banks, NBFCs and housing finance companies are permitted to allow their customers a 3 month moratorium in repayment of EMIs. This means that the borrower may not pay any EMI for 3 months subject to bank’s approval. This delay in EMIs will not have any negative impact on credit score.

Relevant Posts

COVID-19 – RBI Regulatory Package

RBI reduces repo rate & reverse repo rate by 75 & 90 basis points

RBI Circulars on Change in Repo/Reverse Repo Rates dated 27.03.2020

Objectives of Recent Monetary Policy of RBI

The main objectives of the recent monetary policy of RBI are as follows:

• Controlling imports and exports:Monetary policy helps industries to get a loan at a reduced interest rate, which means they can substitute imports by export-oriented units and, in turn, increase exports.
• Promotion of savings and investments:A monetary policy can impact the savings and investment of the people. A higher rate of interest will result in greater investments and savings, thereby maintaining a healthy cash flow within the economy.
• Managing business cycles:There are two main stages of a business cycle – boom and depression. The monetary policy is one of the most efficient financial tools that can help to control the boom and depression period of business cycles by managing credit distribution and supply of money in the economy.
• Employment generation:A monetary policy can lead to reduced interest rates, which means small and medium enterprises (SMEs) can easily secure a loan for business expansion. This means more employment generation.
• Development of infrastructure:The monetary policy by RBI allows concessional funding for the development of infrastructure within the country.
• Developing and managing the banking sector:The central bank is responsible for managing the entire banking industry. RBI also instructs other banks using the monetary policy to establish rural branches for agricultural development wherever required. Additionally, the government has also set up cooperative and regional rural banks to help farmers receive the financial aid they require in no time.

RBI joins corona virus fight with big-bang rate move, EMIs put on hold. Make no mistake, it is a fight never seen before, Das warned while outlining the risks to Indian economy .

Key announcements made by Reserve Bank of India on March 27, 2020 :

Indicator	Current Rate	Existing Rate	Impact
CRR	3%	4%	Higher the CRR, lower the amount of money banks can lend out or invest. So, when the CRR is higher, lower would be the liquidity and vice versa. It is not necessary that a hike in the CRR would lead to a hike in home loan interest rate. But, as a reduce in rate in the CRR increase the supply of credit, when the RBI reduce the CRR, banks would reduce home loan interest rates if the demand for credit does not fall proportionately.
SLR	18.50%	19.5%	When the SLR is high, banks have less money for commercial operations and hence less money to lend out. When this happens, home loan interest rates often rise. When the SLR is low, similarly, home loan interest rates are likely to fall.
Repo Rate	4.40%	5.15%	Increase in funds for loans, Reduce in Loan EMI
Reverse Repo Rate	4%	4.9%	The purpose of this measure, relating to reverse repo is to make it relatively unattractive for the banks to passively deposit the funds with the RBI and instead to use these funds to lending to the productive sectors of the economy,
Marginal Standing Facility Rate	2%	3%	Tt should provide comfort to the banking system by allowing it to avail an additional Rs 1.37 lakh crore of liquidity under the LAF window

Other changes/Information

• Hopes of a shallow recovery in 2020 dashed.
• India’s GDP growth of 5% at risk.
• High likelihood of the global recession.
• RBI to conduct auctions of LTRO of up to 3 yr tenor up to Rs 1 lakh Cr.
• The first auction of Rs 25,000 cr will be conducted later today.
• Rs 1.37 lakh Cr to be released via CRR cut.
• 1-time dispensation: Minimum daily CRR balance cut from 90% to 80% w.e.f. March 28, 2020.
• Liquidity infusion of Rs 3.74 lakh Cr cr via the three steps announcement – LTRO, CRR & MSF.
• Mitigating debt servicing burden to prevent transmission of financial stress to the real economy, provide relief to borrowers.
• Permitted to allow a 3-month moratorium for all lending institutions.
• 3-month moratorium on payment of installments of loans outstanding on March 1, 2020
• With the liquidity measures: RBI’s liquidity measures works out to 3.2% of GDP
• Depositors of commercial banks including Pvt banks need not worry about the safety of their funds

Frequently Asked Questions

Here are questions on RBI decision related to personal loan / EMI/  creditcard bills answered._

1. My EMI is due soon. Will the payment not be deducted from my account?

• The RBI has only allowed banks to allow a moratorium. Individual banks will have to allow suspension of EMIs. The borrower will have to request the bank and show that his or her income has been impacted by the coronavirus disruption. This means that unless you have specific approval from your bank, your EMIs will still be deducted from your account.

2. Is this a waiver of EMIs or a deferment of EMIs?

• This is not a waiver, but a deferment. You will have to pay the EMIs at a later as decided by the bank. The RBI has told banks to have board approved policies in place on moratorium/deferment.

3. Does the moratorium cover both principal and interest?

• It does. If announced by your bank, you can forego payment of your entire EMI, including payment and interest.

4. What kind of loans does the moratorium cover?

• The RBI policy statement explicitly mentions term loans, which includes home loans, personal loans, education loans, auto  and any loans which have a fixed tenure. The also include consumer durable loans, such as EMIs on mobiles, fridge, TV etc

5. Does the moratorium cover credit card payments?

• After clarification from RBI the payment under Credit card is covered.

6. I have taken a business loan. Can I not pay my EMI?

• The moratorium has been allowed on retail loans