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RBI PACKAGE FOR 2021 PANDEMIC
Read more on - Polity | Economy | Schemes | S&T | Environment
- The RBI Governor Shaktikanta Das addressed a press meet on 05th of May, to explain the RBI’s stance on the evolving pandemic situation in India. We discuss the key parts of the announcements made.
- Simultaneously, shoring up livelihoods and restoring normalcy in access to workplaces, education and incomes becomes an imperative. As in the recent past, the Reserve Bank of India (RBI) will continue to monitor the emerging situation and deploy all resources and instruments at its command in the service of the nation, especially for our citizens, business entities and institutions beleaguered by the second wave. The devastating speed with which the virus affects different regions of the country has to be matched by swift-footed and wide-ranging actions that are calibrated, sequenced and well-timed so as reach out to various sections of society and business, right down to the smallest and the most vulnerable. While doing so, our admiration and gratitude goes out to the brave citizens of our nation, to our doctors, healthcare and medical staff, police and law enforcement agencies and to other authorities who battle the second surge selflessly and tirelessly and have been at the frontline for more than a year. Their services to our nation are needed now, more than ever. The quarantine facilities of the RBI continue to operate with more than 250 RBI personnel and service providers – away from their homes – to ensure continuity of various segments of financial markets and RBI operations.
- Since the pandemic began, I have on several occasions expressed my genuine faith in India’s resilience and capacity to overcome all odds. To quote Mahatma Gandhi – “My faith is brightest in the midst of impenetrable darkness.” Over a year now, we have struggled to free ourselves from the pandemic’s deadly grip. Between mid-September and February, as a country, we did manage to lower infections at a time when the rest of the world was reeling under malevolent surges of the virus. This time around, we have to marshal our resources and fight it again with renewed vigour, ignited by the determination to overcome, and to return to normalcy and sound health.c
- Before I set out the measures that the RBI is proposing to undertake as the first part of a calibrated and comprehensive strategy against the pandemic, let me reflect on the macroeconomic and financial conditions that prevail, so that the context in which today’s measures are being taken, can be appreciated.
- The global economy is exhibiting incipient signs of recovery as countries renew their tryst with growth, supported by monetary and fiscal stimulus. Still, activity remains uneven across countries and sectors. The outlook is highly uncertain and clouded with downside risks. In April 2021, the International Monetary Fund (IMF) revised up its global growth projection for 2021 to 6.0 per cent (from 5.5 per cent projected in January 2021) on the assumption that vaccines would be available in advanced economies (AEs) and some emerging market economies (EMEs) by the summer of 2021 and in most other countries by the second half of 2022. World merchandise trade maintained its recent uptrend, growing by 5.4 per cent in February 2021 on a year-on-year (y-o-y) basis. Consumer price index (CPI) inflation remains benign for major AEs; in a few EMEs, however, it persists above targets on account of firming global food and commodity prices. Global financial markets regained buoyancy in April on vaccine optimism after bouts of volatility in February-March, followed by corrections.
- Moving to domestic developments, aggregate supply conditions are underpinned by the resilience of the agricultural sector. The record foodgrains production and buffer stocks in 2020-21 provide food security and support to other sectors of the economy in the form of rural demand, employment and agricultural inputs and supplies, including for exports. The forecast of a normal monsoon by the India Meteorological Department (IMD) is expected to sustain rural demand and overall output in 2021-22, while also having a soothing impact on inflation pressures.
- Aggregate demand conditions, particularly in contact-intensive services, are likely to see a temporary dip, depending on how the COVID situation unfolds. With restrictions and containment measures being localised and targeted, businesses and households are learning to adapt. Consequently, the dent to aggregate demand is expected to be moderate in comparison to a year ago. Reports suggest that the disruption in manufacturing units so far is minimal. Consumption demand is holding up, with sales of consumer goods rising in double digits in January-March 2021, and average daily electricity generation up by 40.0 per cent year-on-year in April. Rail freight has registered growth of over 76 per cent year-on-year in April. Toll collections in April suggest that mobility has declined but quite unlike the abrupt halt in mobility during April last year. Registration of automobiles in April 2021 has shown moderation compared to March. The tractor segment continues its robust pace. The Purchasing managers’ index (PMI) for manufacturing continued in expansion mode at 55.5 in April 2021 compared to 55.4 in the preceding month. Overall, the high frequency indicators are emitting mixed signals. The RBI will closely and continuously monitor all incoming data to assess on a real time basis the impact of the second wave on macro-economic and financial conditions.
- Year 2020 saw the Reserve Bank of India (RBI) do most of the heavy lifting in providing relief to the economy
- The shockingly huge second wave has now prompted the central bank to come up with a fresh set of measures to support different segments
- Both demand and supply are likely to be affected due to state government mandated localised lockdowns
- Lower output will reverse the ongoing economic recovery
- The impact is likely to be less severe than last year, disruption in economic activity will add to the overall cost
- Economic impact will depend on the quality of medical response
- To address the funding needs of the health sector, the RBI launched an on-tap liquidity window worth Rs.50,000 crore. Under this scheme, banks will be able to provide loans to businesses engaged in the area of manufacturing, importing, or supplying vaccines and medical devices. Banks will also be able to lend to hospitals, dispensaries, and pathology labs.
- To incentivise banks for creating a Covid loan book, the RBI will offer 40 basis points higher than the reverse repo rate for surplus liquidity up to the size of the Covid book. This will help increase funding for the health sector at a lower cost.
- The RBI will conduct special three-year long-term repo operations worth Rs.10,000 crore at the repo rate for small finance banks (SFBs). The funds will have to be used for fresh lending up to Rs.10 lakh per borrower. This will help small businesses in the unorganised sector. Additionally, SFBs will be permitted to rate fresh lending to microfinance institutions for on-lending to individual borrowers as priority sector lending. This relaxation will be available till the end of the fiscal year.
- The idea is to support small businesses and individual borrowers likely to be affected the most because of economic disruption.
- RBI has further extended the incentive given to commercial banks in terms of calculating the cash reserve ratio on account of lending to micro, small, and medium enterprises (MSMEs).
- The RBI has also relaxed the restructuring framework to provide relief to MSME borrowers. Besides relaxing rules for different sets of private-sector borrowers, the central bank has eased norms regarding the overdraft facility for state governments.
- Summary: The RBI's focus is on medical sector and SMBs. No general moratorium announced. Banks and other lenders have the discretion to extend benefits. Most of the measures are anyway for small borrowers. It is a fact that RBI will not be able to do as much as in 2020. The real policy rate is in negative territory and the financial system has significant excess liquidity. Potentially higher inflation and capital outflows because of faster economic recovery in some of the advanced economies could increase macroeconomic risks.
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