Key Highlights of 7th Bi-monthly Monetary Policy Committee (MPC) Meet (March 27, 2020)
Amid the Coronavirus pandemic, crucial relief measures are announced by Government & RBI to deal with the economic impacts of COVID-19 in India.
Relief Measures By Government & RBI Amid Coronavirus Outbreak
Finance Minister Announced a Fiscal Stimulus Package of Rs.1.7 Lakh Crore (26th March, 2020)
- The Coronavirus pandemic has led to lockdown and massive losses to businesses. The smaller business entities have suffered the worst and the lower income groups were particularly affected.
- On 26th March, 2020, Finance Minister Nirmala Sitharaman announced a Fiscal Stimulus Package of Rs.1.7 Lakh Crore under Prime Minister Garib Kalyan Scheme.
- The relief package by Finance Ministry will address 3 important concerns :
- Food Security
- Cash Transfers
- Welfare Concerns of Poor
- The package has focused needy and primarily aimed at easing the troubles being faced by the lower strata of the society due to the disruptions caused by COVID-19.
- Prime Minister Garib Kalyan Scheme includes the People under MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), needful under Jan Dhan Yojana, Women and households under Ujjwala scheme, Organised sector workers under EPFO and Construction workers etc.
Key Relief Measures Announced by Finance Minister Amid COVID-19
The key economic relief measures by Government include :
- Medical Insurance Cover of Rs.50 Lakh per person for Doctors, Nurses, Paramedics, Sanitation Workers, ASHA Workers
- Early Money for farmers under Pradhan Mantri Kisan Yojana
- Increase in MNREGA wages from Rs.182 to Rs.202
- Rs.500 per month for the women Jan Dhan Yojana account holders for next 3 months
- Free LPG cylinder for the Ujjwala beneficiaries – families below poverty line
- Collateral free loan amount is doubled from Rs.10 Lakh to Rs.20 Lakh for Self-help groups for women
- Measures on EPF Front :
- Government will pay EPF contribution of 24% for next 3 months; Only for establishments up to 100 employees, where salary 90% of employees < Rs.15,000 per month
- Amendment of EPF Regulation : Workers can withdraw funds : 75% of EPF amount or 3-months salary whichever is lower for contingency expenditure
- Financial Services Measures :
- Removal of debit card ATM charges
- Waiver on maintaining minimum balance
- Reduction in digital bank charges for trade transactions
- Tax Measures :
- FY2018-19, tax return filing deadline extended to June 30, 2020
- Reduction in Interest rates :
- For Delayed payments made till June 30 from 12% to 9%
- For delayed deposit of TDS from 18% to 9%
- GST :
- GST Return for March, April, May & Composition return extended till June 30;
- For companies < Rs.5 Cr : No late fee & penalty to be charged
- For companies > Rs.5 Cr : Only interest at the rate of 9%
Relief Measures Announced by RBI (27th March, 2020)
- A day after Finance Ministry announced a fiscal stimulus package of Rs.1.7 Lakh Crore to fight against Coronavirus pandemic, the Reserve Bank of India joined the big fight on 27th March, 2020 with a host of measures aimed at minimizing the damage from COVID-19.
- RBI Governor Mr. Shaktikanta Das during MPC meet announced a series of measures to ensure liquidity and stability in the country’s financial system as India battles coronavirus.
- RBI has made key announcements in its seventh Bi-monthly MPC meet FY2019-20 in order to :
- Mitigate the negative effects of the virus
- Revive growth
- Preserve financial stability
Significant Cut in Policy Repo Rate & Reverse Repo Rate
- RBI cut the Policy Repo Rate under the liquidity adjustment facility (LAF) by 75 basis points to 4.40% from 5.15% with immediate effect. It is the lowest Repo Rate since 2004 when policy rate was 4.5%.
- The marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.65% from 5.40%.
- MPC cut the Reverse Repo Rate by an “asymmetrical” 90 basis points, so as to make it unattractive for banks to deposit funds with RBI. The reverse repo rate has been reduced to 4% from 4.90%.
- The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy, while ensuring that inflation remains within the target.
Widening Monetary Policy Corridor
- In view of persistent excess liquidity, RBI has decided to widen the existing policy rate corridor from 50 bps to 65 bps.
- Under the new corridor, the Reverse Repo Rate under the liquidity adjustment facility (LAF) would be 40 bps lower than the policy repo rate.
- The marginal standing facility (MSF) rate would continue to be 25 bps above the policy repo rate.
- RBI has announced to Inject Total Liquidity of Rs.3.74 Lakh Cr in Banking System with following three way liquidity injection.
- Rs.1 Lakh Cr through Targeted Long-term Repo Operations (TLTROs)
- Large selloffs in markets have intensified redemption pressure.
- RBI is going to conduct auctions of long-term repo operation (LTRO) of up to three-year tenure of appropriate sizes for a total amount up to Rs.1 Lakh Crore at a floating rate linked to the policy repo rate.
- The liquidity availed by banks under the scheme has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures, over and above, the outstanding level of those investments in these bonds, as on March 25, 2020.
- Eligible instruments comprise both primary market issuances as well as secondary market purchases, including from MFs and NBFCs.
- Rs.1.37 Lakh Cr through Reduction in Cash Reserve Ratio (CRR)
- Despite ample liquidity in the banking system, its distribution was highly asymmetrical.
- To help banks tide over the disruption caused by COVID-19, RBI has reduced the Cash Reserve Ratio (CRR) of all banks by 100 bps to 3% from 4%. This exemption is available for a period of one year ending on March 26, 2021.
- CRR reduction by 100 bps will inject the liquidity of almost Rs.1.37 Lakh Cr in the banking system.
- Rs.1.37 Lakh Cr through Marginal Standing Facility (MSF)
- Under RBI’s Marginal Standing Facility (MSF), it is decided to raise in banks’ overnight borrowing limit to 3% from 2% of Statutory Liquidity Ratio (SLR).
- This measure will be applicable up to June 30, 2020 and it will provide comfort to the banking system by allowing it to avail an additional Rs.1.37 Lakh Crore of liquidity.
- Rs.1 Lakh Cr through Targeted Long-term Repo Operations (TLTROs)
Relief Measures to Borrowers
- EMI Moratorium
- All lending institutions – commercial, regional, rural, NBFCs and small finance banks have been permitted a three-month moratorium on payments of installments of all term loans outstanding as of March 1, 2020.
- Deferment of interest on working capital facilities
- Lending institutions can defer by three months payment of interest outstanding as on March 1 on working capital facilities sanctioned in the form of cash-credit and overdraft and such.
- The accumulated interest for the period will be paid at the end of the deferment period.
- Moratorium on loan EMIs and the deferment of interest on working capital will not result in asset classification downgrade
- Easing of working capital financing
- In respect of working capital facilities sanctioned in the form of cash credit, overdraft, lending institutions are allowed to recalculate drawing power by reducing margins or by reassessing the working capital cycle for borrowers.