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Time after time: On RBI repo rate cut

Bhumika Bansal

The RBI might have Go hand in hand for now with the latest repo rate cut.The RBI has once again STEPPED UP TO THE PLATE at the right time with measures that will reduce the cost of capital and ease the financial burden on businesses due to the extended lockdown.

With Friday’s repo rate cut of 40 basis points, the RBI has snipping of 1.15 percentage points from the rate chart in the 58 days since the lockdown began, bringing the repo rate downwards to 4% and the reverse repo rate to 3.35%. With this, it does appear that the central bank may have PLAYED OUT its rate cut card for now as PRUDENCE would dictate that it reserves some LEVERAGE for the future if economic conditions deteriorate even further. In fact, there are those who believe that the latest cut may be no more than a sentiment booster as economic activity is at its Lowest point and there are not many investment proposals on the smithy that may benefit from the lower interest rate. Existing borrowers may be the only beneficiaries of the rate cut at this point in time.

That said, the RBI deserves a pat on the back for 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.

Yet, going forward, there may be more opting for it given that the extended lockdown has left many a business in a SHAMBLES and salaries have either not been paid or are being disbursed with delays.

The RBI has also shown EMPATHY by allowing accumulated interest on working capital loans to be converted into a term loan repayable by the end of this fiscal. Borrowers would otherwise have been faced with the DAUNTING prospect of PAYING UP their interest dues in one shot at the end of the moratorium period. The extended period given is however still not be enough as it will offer borrowers only about seven months from the end of the moratorium period during which they will have to stimulate their businesses and service their loans.

The RBI could have PUT OFF accumulated interest repayment by one year; it might well find itself in a situation where it is forced to offer another extension in the next few months. The increase in group exposure limit for banks to 30% from 25% will help large corporate borrowers who may find themselves handicapped in raising funds from the markets now. There was 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, and hence it will be difficult to propose the right restructuring norms. Chances are that this may well form part of the RBI’s next announcement.