The Indian Government, in tandem with the Reserve Bank of India’s Monetary Policy Committee (MPC), recently announced their measures to assuage the economic ramifications following the outbreak of the novel coronavirus, COVID-19. Marking the first instance where the MPC met outside its regular schedule, these measures were revealed in response to the announcement of the Pradhan Mantri Gareeb Kalyan Yojana by the Government.
The Global Recession Induced by the Pandemic
According to Kristalina Georgieva, the chief of the International Monetary Fund (IMF), the global economy has plunged into a recession expected to be more severe than the 2009 recession in the wake of the global financial crisis. A recession typically denotes a considerable drop in general economic activity. Moody’s Investor Service, a renowned rating agency, has further downgraded India’s GDP growth forecast for 2020 to 2.5%, a stark dip from the earlier projection of 5.3%, spurred by the impact of the pandemic and the consequent lockdown.
Expected Economic Recovery Post Crisis
Despite the possibility of an overall contraction of GDP by 0.5% across G20 countries, with India’s growth rate expected to fall to 2.5% in 2020, a considerable recovery is anticipated in 2021. The US and Euro area are likely to face a contraction of 2% and 2.2% respectively in 2020 but bounce back in 2021. Similarly, China’s growth rate, though decelerating to 3.3% in 2020, is expected to recover to 6%.
RBI’s Strategy: Reduction in Repo and Reverse Repo Rate
In a bid to encourage banks to lend more and boost growth, RBI slashed the repo rate by 75 basis points (bps) from 5.15% to 4.40%. Conversely, the reverse repo rate was cut by 90 bps to 4% with the intention of compelling banks to lend more instead of maintaining their surplus liquidity with the RBI.
Non-disclosure of Macroeconomic Indicators amid Uncertainty
Given the uncertainties surrounding the current situation, the MPC chose not to provide growth and inflation projections. It was underscored that the growth outlook will be largely influenced by the intensity, duration, and speed of the pandemic, highlighting the inherent risks to growth from an extended lockdown.
Moratorium on Loan Repayments
To alleviate distress among firms, RBI decided to permit banks to defer the payment of EMIs on home, car, personal loans, and credit card dues for three months till May 31. While not a loan waiver or offering any reduction on interest payout, this move gives customers extra time to repay without any negative impact on their credit scores or being labelled as non-performing assets.
Impact on Banks and Additional Liquidity Infusion
While this might momentarily affect the cash flows of banks and lending institutions due to deferred repayments, the RBI has assured them additional liquidity by lowering their cash reserve ratio (CRR) requirements. A whooping 3.4% of GDP, amounting to Rs. 3.74 lakh crore, will be injected into the economy through targeted long-term repo operations, a cut in cash reserve ratio, and easier borrowing requisites under the marginal standing facility window.
Preparing for a Future Crisis
Hitherto unseen, the crisis has called for governments and regulators to be reactive rather than proactive. However, the priority going forward is to initiate strong and decisive action to lessen the detrimental macroeconomic impact of the pandemic.
