The COVID-19 pandemic has brought the world to a standstill. Along with the loss of human lives, the pandemic has brought drastic impacts on economies worldwide. Countries have united to find vaccines for the virus and tackle the damage to their economy. With the projections for growth that the International Monetary Fund (IMF) and various other international financial institutions have given, the slowdown in Indian economic growth is inevitable.

The central banks of all the nations are coming up with various COVID-19 relief funds, and stimulus packages are being announced worldwide. A growing economy like India is also reeling under the pressure imposed by this pandemic. 

The country’s apex bank, the Reserve Bank of India (RBI), has come up with various steps, including a considerable RBI stimulus package and RBI moratoriums to lessen the impact of the COVID-19 pandemic. Let’s have a look at the RBI’s stimulus package and understand its significance.

Understanding the need for RBI’s economic stimulus package

The word stimulus is frequently heard these days concerning the world’s response to handling the financial crisis caused by the COVID-19 pandemic. But what is a stimulus, and why is it essential in the current situation?

To define economic stimulus for a layperson, an economic stimulus is an action taken by a government or a bank to encourage activity and growth in the economy, for example, to avoid a recession. In the current situation, when almost all economies in the world are in a state of a shutdown and unemployment is rising, governments look at stimulus packages, moratoriums, and COVID-19 relief funds as tools to reduce the effects of an overall economic slowdown. The stimulus is designed to boost spending, which creates demand. An increase in demand leads to job creation and reduces the rate of unemployment, which becomes one of the most significant issues during the recession. 

The Indian government has also announced a two-part stimulus package. In a country of 130 billion people, the RBI’s stimulus package was needed to safeguard the interest of all the sections of society who have been severely impacted by the pandemic. The economic measures announced as a part of the RBI’s stimulus package would also help the Indian economy to combat the long-term adverse effects caused by the pandemic. Also, to help borrowers keep their credit history intact even after skipping EMIs and restructuring loans for a specified period, RBI has asked lenders to allow a second moratorium

Now that the requirement for the stimulus is understood, let’s examine the various steps in which the RBI’s stimulus package will help the Indian economy.

Decoding the RBI’s stimulus package in 10 points

The Indian government, along with the RBI, has announced various measures as part of its two-part RBI stimulus package. The stimulus packages are designed to provide maximum benefits to those impacted and minimize the damage to the economy due to the pandemic. Under the RBI’s stimulus package, the following initiatives aimed at reducing the financial distress that the economy is undergoing have been taken:

  • Relaxation on payment of EMIs’ by providing an RBI moratorium

The RBI moratorium is also known as the EMI holiday. It is the period where borrowers need not pay any EMI for the loan that they have taken. As per RBI’s directions, customers who opt for the RBI moratorium would defer their EMI payments and increase the total duration of loan repayment by three months.

Under the stimulus package, the RBI instructed all the banks and other financial lenders to offer a three-month moratorium to all borrowers on their outstanding loans in 2020. Not just that, eligible borrowers, who did not use the first RBI moratorium can avail of the second RBI moratorium. The individuals who did avail of the first RBI moratorium can get their moratorium period extended.

However, availing an RBI moratorium would also increase the total interest amount. Nonetheless, it would provide huge relief, especially to self-employed professionals or small businesses whose income has been affected by the lockdown. You can read more about the moratorium here.

  • Reduction in the repo and reverse repo rates

The RBI has reduced the repo and reverse repo rates to 4.4% and 3.75%, respectively, as a part of the RBI stimulus package. The repo rate is the interest rate at which the RBI lends the money to banks. The reduction in the repo rate would encourage banks to borrow from RBI, enhancing their lending capability to the business.

A reduction in the reverse repo rate would also help banks to utilize their funds for increasing their lending capacity by nearly Rs. 3 lakh crore. This move would benefit the economy and ensure growth and financial stability as it would supply money at a lower interest rate.

  • Measures to increase liquidity

RBI has adopted a planned approach to make sure that the economy does not face a liquidity crunch. Under the stimulus package, RBI announced liquidity measures amounting to Rs. 3.7 trillion, which accounts for almost 1.8% of the country’s GDP.

The three primary actions are focused on Long Term Repo operations: reduction in CRR (cash reserve ratio), cut 100 basis points to 3% (which would keep the liquidity to almost Rs. 1,37,000 crores spread across all the banks), and an increase in the marginal standing facility. These liquidity measures would help the banks to maintain enough liquidity to handle the slowdown which will follow in the coming months.

  • Increase in advances for states

Through its ways and means to advance mechanism, RBI has tried to provide immediate cash to the government under the stimulus package. This helps in maintaining the balance between payments and receipts. In the wake of COVID-19 pandemic, the RBI has decided to increase the WMA limit by over 60%, which would stay in effect till 30th September. The state governments have appreciated this step as it would provide them a large number of funds if needed, but have also demanded more access to funds.

  • Restrictions on dividend distribution

Under the stimulus package, the RBI has prohibited all the commercial banks, including the cooperative ones, from distributing any dividends from the profits earned in the financial year 2019-20, which ended on 31st March 2020. This restriction would be in place until further notice and would be reviewed on 30th September 2020, after taking into consideration the financial condition of the banks as of September 2020.

  • Measures for NBFCs

The RBI announced a Rs. 50,000 crore long term repo rate program specifically for non-banking financial corporations that offer credit to small and medium business enterprises under the stimulus package. The RBI further stated that the funds availed by banks under this scheme would be invested in grade bonds, commercial paper, and non-convertible debentures of NBFCs, and 50% of it be allocated to small and mid-sized organizations.

Providing further relief to the commercial real estate borrowers of NBFCs, the RBI has provided a relaxation of one year for the date of commencement to the real estate projects in addition to the existing one-year extension, which has been delayed due to COVID-19.

  • Relief package for NABARD, SIDBI, and NHB

Keeping in view the welfare of small financial institutes, which constitute regional rural banks, microfinance institutes, and cooperative banks (which are usually catered by the National Bank for Agriculture and Rural Development), the RBI has come up with Rs. 25,000 crores for refinancing these by NABARD.

The refinancing packages amounting to Rs. 10,000 crores and 15,000 crores were also announced for the Small Industrial Development Bank of India and National Housing Bank, respectively, under the RBI’s stimulus package. This would help these organizations support their borrowers.

  • Stimulus plan to aid the economically weaker sections of the society

The lockdown caused due to the pandemic has led to a complete shutdown of the economy. It has heightened the severity of the effect on the economically vulnerable. Keeping in view the welfare of such sections of society, the finance minister has announced a COVID-19 relief fund stimulus of $22.6 billion valued at 0.8% of the country’s GDP. 

This is primarily focused on providing direct cash benefits and food security measures, which would benefit millions of those who have been impacted. The government has announced the distribution of additional free ration supplies for the next three months and also various cash benefits by increasing the wages under Mahatma Gandhi Employment Guarantee Scheme ex-gratia of Rs.1,000/- to pension-seeking senior citizens, widows, and disabled and Rs.500/- to the women Jan Dhan account holders. All these relief measures under RBI’s stimulus package are designed to benefit the economically weak section.

  • Insurance for healthcare workers

In addition to the benefits for the poor, the government has also announced an insurance cover for healthcare workers. The insurance of Rs. 50 lakhs per healthcare worker involved in fighting the COVID-19 was announced by the government. Doctors/nurses, health workers, sanitation staff and all those associated with providing health-related services will benefit from the insurance for healthcare workers.

  • The upcoming business stimulus package

There are reports that say that the government is working on a business-specific COVID-19 relief fund that will be focused on helping industries and businesses suffering the most due to the pandemic. Some possible options include reducing or waiving the GST to the worst hit sectors, and the incentives are expected to focus on industries like MSMEs, aviation, real estate, F&B, and IT. The COVID-19 relief package is expected to be announced soon.

Most experts and analysts have had a mixed reaction to the measures being taken by RBI. While some think the steps are as per expectations, others believe there is still a scope to do better things, especially for business sectors like tourism, hospitality, F&B, etc., that are suffering a great deal. Apex trade association like ASSOCHAM has suggested that the government reduce the GST by 50% for at least three months. The ASSOCHAM has also said that India might be required to infuse $200 billion for the next 12-18 months. An immediate cash infusion of $50 billion – 100 billion would be needed in the next three months to curb the job losses and loss of income thus caused.

The COVID-19 pandemic has had a significant impact on the global economy, and India is no exception. While the RBI has taken the necessary steps to cushion the Indian economy and lessen the adverse effects of the pandemic, a lot more needs to be done. The RBI has to be proactive to gauge the impact of the measures taken on the economy. It must also maintain flexibility in modifying its policies or come up with required measures as per the need in the future. As of the time of this report, another RBI’s stimulus package focused on helping businesses is expected soon and one can hope that the same will bring relief to the industries as well.