Summary of RBI Press Conference held on 22nd May, 2020


Summary of RBI Press Conference held on 22nd May, 2020

  • Domestic Development:-
  •      Domestic Industrial development in being infected severely in the 2 Month lockdown period.
  •      Top-6 Industrialize State of India are accounting about 60% of our industrial output, they are    largely in Red or Orange Zones.
  •      High frequency indicators point to a collapse in demand beginning in March,2020 across both urban and rural segments.
  •      Electricity and petroleum consumptions which are indicators of day to day demand have plunged into sleep declines.
  •      The double whammy of in terms of losses of both in demand and production has in turn taken its toll on fiscal revenues.
  •      The biggest blow from Covid-19 has been to private consumption which accounts for about 60% of domestic demand.
  •      The production of consumer durable rebels falls by 33% in March, 2020 accompanied by 16% decline in output of non-durables.
  •       Similar indications are reflected in surveys of the fast-moving consumer space also,
  1.        In the production sectors industrial production shrank by about 17% in march with manufacturing activity down by 21%.
  2.        The output of core industries which constitutes about 40% of overall industrial production contracted by 6.5%.
  3.        In conformity the manufacturing PMI for April, 2020 recorded its sharpest deterioration to 27.4% spread across all sectors.
  •      The services PMI plunged to an all time low of 5.4% in April, 2020.
  •      It is this encircling bloom agriculture and allied activities have however provided a beacon of hope on the back of an increase of 3.7% in food grain production to a new record.
  •      Robbie procurement is in full flow in respect of oil seeds pulses wheat benefiting the bumper harvest these developments will support farm incomes improve the term of trade facing farm sector and strengthen food security.
  •     Inflation viewpoint has become complex by the release of incomplete information on the Consumer Price Index (CPI) by National Statistical Organization obscuring a comprehensive of the price situation.
  •      On the basis of partial data that have been made available food inflation which had eased from January, 2020 to March, 2020 now unexpectedly they have reversed and surged to 8.60% in April, 2020 as supply disturbances took their toll resistant to the ongoing demand compression.
  •      Prices of pulses, milk, oil seeds, cereals and vegetable immersed as pressure points.
  •     In the external sector India’s merchandize exports and imports suffered their worst slump in the last 30 year as Covid-19 paralyzed world production and demand.
  •      India’s merchandize exports plunged by 60.30%in April, 2020, while imports contracted by 58.60%.
  •     India’s foreign exchange reserves have however increased by 9.2 billion from 1st April and so far, that is upto 15 May,2020 India’s foreign exchange reserves stand at 487 billion USD which is equivalent to one year’s imports.
  • Inflation:-
  •       MPC assists that inflation outlook is highly uncertain the supply shock to food prices in April may show persistence over the next few months depending upon the state of lockdown and time taken to restore the supply chains after relaxation of the lockdown.
  •      The elevated level of pulses inflation is worrisome and warrants timely and swift supply side interventions including a reappraisal of the import duties.
  •      Immediate step up of open market sales PDS of tech by FCI to offload some part of excess stocks can also cooldown cereal prices and also create room for rubies procurement.
  •      Given the current global supply balance international crude oil prices and industrial raw materials are likely to remain soft this would ease input costs for domestic firm’s deficient demand may hold down pressure on core inflation.
  •     Although persistent supply dislocation impart uncertainty to their near term outlook much will depend on the shape of the recovery after covid-19.
  •     Accordingly, the MPC is of the view that headline inflation may remain firm in the first half of 2020 but should ease in the second half aided also by favorable by Q-3 and Q-4 of the current financial year.
  •     It is expected that the headline inflation will fall below the target of 4% thus NPC’s forward guidance on inflation is directional rather than in terms of levels.
  • Growth:-
  •       In the growth outlook that MPC just the risk to be the gravest the combined impact of demand compression and supply disruption will depress economic activity in the first half of the year assuming that economic activity gets restored in a phased manner especially in the second half of this year and taking into consideration favorable base effects.   
  •     It is expected that the combination of fiscal, monetary and administrative measures being currently and undertaken both by the government and the RBI would create conditions for a gradual revival in activity in the second half of 2021.
  •      Nonetheless downside risk to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing and lockdown.
  •      Given all this uncertainties GDP growth in 2021 is estimated to remain in the negative territory with some pickup in growth impulses in half of 2021 onwards.
  •    At the end May, 2020 national income should provide greater clarity more specific projections of GDP growth in terms of both magnitude and direction much will depend on how quickly the Covid-19 curve flattens and begins to moderate.
  •     The MPC is of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated beyond the destruction of economic and financial activity livelihood and health are severely affected.
  •       Judging that the risk to growth are acute while the risk to inflation are likely to be short lived.
  •      The MPC believes that it is essential now to instill confidence and ease financial conditions further this will facilitate flow of funds at affordable rates and rekindle investment impulses.
  •        It is in this context that the MPC voted to reduce the policy reverse the policy Repo Rate by 40 basis points from 4.40% to 4.00%.
  •        If the inflation trajectory evolves as expected more space will open up to address the risk to growth.
  • Regulatory and Development Policy Announcement:-
These announcements are being done to complement and amplify the reduction in the policy reported decided by the NPC:-
1.       Measures to improve the functioning of markets and market participants:-
      RBI had announced a Special Refinance Facility of 15,000 cr to SIDBI at RBI’s policy repo rate for a period of 90 days for the lending and refinance operations of SIDBI, in order to provide greater flexibility to SIDBI it has been decided to roll over the facility at the end of the 90th day for another 90 days.
2.       Measures to support exports and imports:-
     It has been decided to increase the maximum permissible period of pre and post shipment export credit sanctioned by the banks from the existing one year to 15 months for disbursement made up to 31st July 2020.

  •      In order to enable the Exim Bank to meet its foreign currency resource requirements it has been decided to extend a line of credit of Rs. 15,000 cr to the Exim Bank for the period of 90 days with rollover of up to one year so as to enable it to avail a USD swap facility.
  •     With a view to providing greater flexibility to importers in managing their operating cycle in covid-19 environment it has been decided to extend the time period for completion of outward remittances against normal imports (excluding import of Gold, Diamonds, Jewellery and precious stones) into India from 6 months to 12 months from the date of shipment of such imports made on or before 31st July,2020.

3.    Efforts to further ease financial stress:-

  •      Further extension of moratorium period for another 3 months starting from 1st June, 2020 to 31st August, 2020 for below matters,
  1.     Granting of moratorium on term loan installments.
  2.     Deferment of interest for three months on working capital facilities.
  3.     Enabling of working capital financing necessities by reducing margins or reassessment of working capital rotation.
  4.     Exemption from being classified as defaulter in supervisory reporting and reporting to credit information companies.
  5.     Extension of resolution timelines for stressed assets.
  6.     Asset classification standstill.
  •      The lending institute are being allowed to restore the margin for working capital to its original levels by 31st March, 2020 which will make it relaxed for borrowers to manage their cash flow and finance in a steady manner.
  •      The assessment of working capital cycle is being extended upto 31st March, 2021.
  •      It is being allowed to lending institutions to convert the accumulated interest on working capital facilities over the total deforming period of six months that is from 1st March, 2020 to 31st August, 2020 into a funded interest term loan which shall be fully repaid during the course of the current financial year ending 31st march, 2021.
  •     Deferred interest will be converted into funded interest term loan, which will be repaid during the course of current year and payment shall be made by 31st march, 2021.
  •     In view of the current difficulty in raising resources from capital market, the group exposure limit of banks is being increased from 25% to 30% of eligible capital base for enabling corporates to meet their funding requirement from banks. The increased limit will be applicable upto 30th June,2021.

4.    Steps to ease financial constraints faced by the state governments:-

  •       In order to ease the bond redemption pressure on the states it has been decided to relax the rules governing the withdrawal from the Consolidated Sinking Fund (CSF), while at the same time ensuring that depletion of fund balance is done prudently together with the normally permissible with royal this measure will enable the states to meet about 45% of the redemptions of their market borrowings which are due in the current year 2020-21.

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