The ongoing COVID-19 pandemic has brought the world to a standstill. The loss to human lives, along with the drastic impact it is leaving on the world economies, is humongous. Countries have united to find a vaccine to the pandemic, 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 economic growth is inevitable.

The central banks of all the nations are coming up with the various relief measures, 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 stimulus to lessen the impact of the COVID-19 pandemic. Let’s have a look at the stimulus package announced by RBI and understand its significance.

Understanding the need for economic stimulus

The word stimulus is frequently heard these days concerning the world’s response to handling the economic 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 layman, 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 the stimulus package as a tool that reduces 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 the two-part stimulus package as of now. In a country of 130 billion people, the stimulus package was needed to safeguard the interest of all the sections of society who have been severely impacted by the pandemic. The measures announced as a part of the stimulus package would also help the Indian economy combat the long-term adverse effects caused by the pandemic. Now that the requirement for the stimulus is understood let’s examine the various steps that the RBI has taken as part of this stimulus package and how it will help the economy.

Decoding the stimulus package by RBI

The Indian government, along with the RBI, has announced various measures as part of its two-part 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. The following initiatives aimed at reducing the financial distress that the economy is undergoing have been taken:

  • Relaxation on payment of EMIs’ by providing moratorium

The RBI has instructed all the banks and other financial lenders to offer a three-month moratorium to all borrowers on their outstanding loans. The moratorium is also known as the EMI holiday; this 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 moratorium would defer their EMI payments and increase the total duration of loan repayment by three months.

However, this would also increase the total interest amount. Nonetheless, this 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. 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, in turn, enhancing their lending capability to the business.

A reduction in reverse repo rate would also help banks to utilize their funds for lending 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 rate of interest.

  • Measures to increase liquidity

RBI has adopted a planned approach to make sure that the economy does not face a liquidity crunch. It 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 advances mechanism, RBI has tried to provide immediate cash to the government. 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

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 NBFCs that offer credit to small and medium business enterprises. 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 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 Small industrial Development Bank of India and National Housing Bank, respectively. 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 and 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 stimulus relief package of $22.6 billion valued at 0.8% of the country’s GDP. 

This is primarily focussed 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 are designed to provide the benefits section to the economically weak.

  • Insurance for healthcare workers

In addition to the benefits for the poor, the government has also announced the insurance cover of Rs. 50 lakhs per healthcare worker involved in fighting the COVID-19, which includes doctors/ nurses, health workers sanitation staff, and all those associated with providing health-related services.

  • Upcoming business stimulus package

There are reports that say that the government is working on a business-specific relief package 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 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 should 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 to it. While the RBI has taken the necessary steps that would provide a cushion to the Indian economy and lessen the negative impacts of the pandemic, a lot more needs to be done. The RBI has to be proactive to gauge the effects of the measures that have been taken on the economy and also maintain flexibility in modifying its policies or come up with more measures as per the need in the future. As of the time of this report, another stimulus package focused on helping businesses is expected soon and one can hope that the same will bring relief to the industries as well.