Saturday, February 27, 2021

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Indian GDP Growth Slashed To Frightening 2.5%; RBI Steps In To Save The Economy

The Reserve Bank of India (RBI) although a tad late finally joined the Government’s initiative to rescue Indian economy from the Covid-19 pandemic with a big bang of financial measures. 

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After Standard & Poors and Moody’s Investors Service recently downgraded India’s growth forecast for 2020 to 2.5 per cent from 5.3 per cent, citing the adverse impact of the novel coronavirus on the country’s economy, the RBI on Friday lowered the key repo rate by 75 basis points (bps) to 4.4 per cent, following in the footsteps of global central banks, to help arrest the economic slowdown in the wake of the Covid-19 pandemic.

Moody’s said that at the 2020 estimated growth rate, a sharp fall in incomes in India is likely, further weighing on domestic demand and the pace of recovery in 2021.

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The reverse repo rate is now 4%, down 90 basis points. The benchmark repurchase rate was decreased by 75 basis points to 4.40% from 5.15%, Governor Shaktikanta Das said Friday after an emergency meeting of the Monetary Policy Committee.  

Repo rate is the rate at which a country’s central bank lends money to commercial banks, and reverse repo rate is the rate at which it borrows from them. Four out of the six members of the Monetary Policy Committee voted in favour of the move.

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The RBI also reduced Cash Reserve Ratio (CRR), the amount of deposits commercial banks must set aside as reserves in cash or as deposits with RBI, by 100 basis points to 3% to boost liquidity.

Das further said that it would be unproductive for banks to park money with the RBI. They will have to give it to the people, he further added. Tough times do not last. Only tough people and tough institutions do, he also said.

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RBI also announced that banks are permitted to allow a three-month moratorium for on payment of EMIs on all term loans that were outstanding on March 1. However, this means that the final decision to provide such a relief is in the hands of the banks.

Apart from reducing key rates, the RBI also announced a slew of liquidity measures related to TLTRO, CRR and MLCR to ease mounting pressure. “It has been decided to reduce the Cash Reserve Ratio (CRR) of all banks by 100 basis points to 3% of Net Demand and Time Liabilities with effect from the fortnight beginning March 28 for a period of 1 year,” the RBI governor announced.

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RBI’ decision to reduce repo rate and reverse repo rate comes in the wake of similar decisions by other central banks that have to take important fiscal measures to fight coronavirus.

The Reserve Bank of New Zealand (RBA) slashed interest rates by 75 basis points. The Reserve Bank of Australia injected $3.6 billion in liquidity into Australia’s financial system and said it was prepared to buy government bonds. In South Korea, the central bank cut its benchmark interest rate by 50 basis points.

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Indian PM imposed a 21 days nationwide lockdown in India, the most far-reaching measure undertaken by any government to check the virus’s spread. On Thursday Finance Minister Nirmala Sitharaman announced a 1.76 lakh crore package under a new scheme called the Pradhan Mantri Gareeb Yojana.

The package was announced to address the immediate distress in the wake of the lockdown announced by the government to help prevent the spread of the coronavirus.

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The government under this scheme aims at distributing 5 kilograms of rice or rice for each person free of cost. The government also said that it would distribute one kilogram of pulses to every low-income family over the next three months. The finance minister also underlined plans for medical insurance of Rs 50 lakh for every front line health worker that would include doctors, nurses and paramedics.

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