To deal with the crippling effects of the pandemic on the economy the government has unveiled certain fiscal measures. After announcing the first round of monetary measures the RBI has unveiled the second round of policy announcements to align itself with the government in its efforts to review the economy. Following are the measures announced by the RBI in its second such announcement.

• The IMF has called the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and termed it to be the worst recession since the Great Depression.
• The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.
• However, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.
• In this regard, both the Centre and state governments, as well as the RBI, have been coming out with policy announcements that mitigate economic distress.

UPSC can frame the question based on the measures announced by the RBI like “What measures were announced by the RBI to deal with Covid-19 impact on the economy?”. Also, pay attention to various terms and their effect on the economy from the macroeconomic point of view. That understanding helps us to answer the question based on basic concepts.

What are the announcements made by RBI?

A) Cutting Reverse-Repo Rate

• To begin with, the RBI has cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point).
• The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent.
• The idea behind repeatedly cutting reverse repo more than the repo is to incentivise banks to borrow from it at low rates and lend it forward to customers.

B) Targeted Long Term Repo Operations

• RBI has announced another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized NBFCs and Micro Finance Institutions (MFIs).
• Again, the benefits of this move are two-fold. One, it provides more liquidity.
• More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves.

C) Credit to NBFCs and MFIs

• All India financial institutions (AIFIs) such as the NABARD, etc. will be provided special refinance facilities for a total amount of Rs 50,000 crore by the RBI.
• This credit will help the end consumer, especially in the rural sector, small industries, and housing finance companies.

D) Expanding Ways and Means Advances (WMAs)

• On the issue of providing liquidity and fulfilling its role as “the lender of last resort”, the RBI also announced that it will provide more funding to state governments — under the WMA facility.
• The WMA is essentially is a facility by which state governments borrow from the RBI to meet the shortfall between their revenues and their expenditure.
• But the WMA is a short-term measure, only meant for exigencies.

E) Easing NPA norms

• Apart from easing liquidity in the system like in the past, the other focus has been to provide an easier regulatory regime.
• The global lockdown has almost completely halted economic activity.
• Under the circumstances, it is natural that business will struggle to pay back their loans and there will be a steady accretion of non-performing assets (NPAs) across the board.
• Similarly, to ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

F) Easing LCR norms

• Lastly, given the stress on the system and the demand for cash, the RBI has allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect.
• The LCR essentially mandates the amount of cash that a bank is required to keep with itself.
• At 100 per cent LCR, a bank would have been required to keep 100 per cent of the net cash it expects to flow out of the bank over the next 30 days.
• With this being reduced to 80 per cent, banks would have more cash to deal with.

Though no direct question on monetary policy was asked in the recent past,  understanding the basic concepts stands us in good stead while writing the related answer in the exam. So, the terms mentioned above like-TLTRO, WMAs etc. are important from exam point of view.

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