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Following cheap policy

Following cheap policy

As nations fight the pandemic, their economies suffer. Many have crafted exit strategies but the task is easier said than done. Governments around the globe have announced fiscal stimulus to support their crippled economies. Markets are down and consumption has fallen. Those with dwindling financial capacity are relying on state aid while those with some reserves portray a saving sentiment; both essentially being a drag on the economy at this hour. It is clear that various sectors of the economy are struggling and the impact of the pandemic-induced national lockdown has been severe. The situation gets adverse with disrupted supply chains and falling demand. The Reserve Bank of India's Monetary Policy Committee (MPC) in its bi-monthly report slashed the repo rate by 40 basis points (bps) down to 4 per cent and reverse repo rate by 40 bps to 3.35 per cent. With its inflation targets in mind, cut in key policy rate comes in as a necessitated measure by the MPC to provide liquidity in the market. MPC rate cut invariably means cheaper loans. The reverse repo down to 3.35 per cent will also serve MPC's purpose of injecting liquidity in the market as it will discourage banks from parking deposits in RBI and instead loan them out in order to avoid losses. MPC's rate cut will make EMIs on home, automobile, personal loans cheaper, boosting the market sentiment and urging people to spend. But on the underside, banks will lower the deposit rates to maintain their asset-liability balance which means depositors and pensioners will receive fewer returns. MPC has also kept the accommodative stance which means that interest rate could be further slashed or remain unchanged in its next report in July. The rate cut marks the ninth consecutive time that the MPC headed by Governor Shaktikanta Das has either maintained or cut the policy rate since February 2019; though for various reasons from oil to the slowdown to now the coronavirus. In fact, shifting from its normal routine, the MPC had in its last monetary policy report in March 2020 slashed the repo rate by 75 bps — largest ever cut — down to 4.40 due to the onset of the pandemic. It had also widened the policy corridor which normally stood at a gap of 25 bps on either side of repo rate. The reverse repo rate was unconventionally decreased by a gap of 40 bps to prevent banks from parking funds at RBI. The trend continued in Friday's report. MPC's policy rate cut should allow liquidity in the market with affordable rates, thereby strengthening consumer confidence. The lockdown has largely curtailed people from heading out and actually spending. While lives are resuming, people are bound to exhibit a conservative approach when it comes to spending. The consumer is expected to feel the need to save rather than spend. MPC expects that low deposition returns from banks will be an effective tool to urge consumers to rather spend the money; if not through direct expenditure then through investments in bonds or shares.

Additionally, the RBI extended the moratorium on term loan repayment by another three months up to August 31, 2020. This is a second consecutive moratorium extension by the Central Bank following the first extension given in March for up to May. The move will buy time for borrowers to operationalise businesses that have gone cold since the imposition of the national lockdown. Since a moratorium still means that interests have to be paid in a lump sum at the end of the period — which is another burden spiking apprehension and hurting sentiment — the RBI has gone a step further to allow banks and borrowers to convert those interests into a term loan payable by March 2021. MPC's rate cut thus appears to serve the current mood of the economy in reviving growth and mitigating the adverse impact of the pandemic whilst keeping the inflation targets in check. The growth is likely to be negative, as reaffirmed by the Das himself, however, it is crucial that appropriate support is extended to improve the situation in these uncertain times.

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