RBI Repo Rate Cut - May 2020

Why in news?

The RBI recently cut the repo rate by 40 basis points as a lockdown measure.

What is the rationale?

• The RBI has cut 1.15 percentage points from the rate chart in the 58 days since the lockdown began.
• This has brought the repo rate down to 4% and the reverse repo rate to 3.35%.
• The move will reduce the cost of capital and ease the financial burden on businesses due to the extended lockdown.
• With a careful move on repo rate, the RBI also seems to reserve some leverage for the future if economic conditions deteriorate even further.

Will this be effective?

• Some believe that the latest rate cut may be no more than a sentiment booster as economic activity is at its all-time low.
• There are not many investment proposals on the anvil that may benefit from the lower interest rate.
• Existing borrowers may be the only beneficiaries of the rate cut at this point in time.

How beneficial are the other RBI moves?

• The RBI is appreciable for its listening to feedback over some of its moves initiated earlier during the lockdown.
• Thus, the extension of the repayment moratorium on loans is a welcome measure.
• A large proportion of commercial borrowers have availed themselves of the moratorium but retail borrowers have not taken to it in a big way.
• But, extended lockdown has left many businesses in a shambles, and salaries have either not been paid or are being disbursed with delays.
• So, going forward, there may be more opting for the moratorium.
• The RBI has also shown empathy by allowing accumulated interest on working capital loans to be converted into a term loan.
• This could be repaid by the end of this fiscal.
• Borrowers would otherwise have faced problems in paying up their interest dues in one shot at the end of the moratorium period.
• The increase in group exposure limit for banks to 30% from 25% will help large corporate borrowers.
• Notably, these have found themselves handicapped in raising funds from the markets now.

What are the concerns?

• The extended period may however still not be enough as it will offer borrowers only about 7 months from the end of the moratorium period.
• During this, they will have to speed up their businesses and service their loans.
• The RBI might well find itself in a situation where it is forced to offer another extension in the next few months.
• So, it could have instead put off accumulated interest repayment by one year.
• There was also some disappointment in the markets that the RBI did not relax norms for loan restructuring by lenders.
• The central bank has played its cards well here because there is no way of knowing the true extent of distress now.
• So, it will be difficult to propose the right restructuring norms.
• Chances are that this may well form part of the RBI’s next announcement.

Source: The Hindu