Credit Policy Review – May 2020

26 May 2020

In less than 2 months and in an unscheduled monetary policy meeting, the RBI announced another fairly steep rate cut along with regulatory measures to further ease the financing conditions in the domestic economy which has been severely impacted by the shutdown in the last 2 months. Today’s policy announcement was the RBIs second monetary policy review for the fiscal year 2020-21.

The MPC reduced the repo rate by 40 basis points to 4% while maintaining its accommodative stance. The MSF, bank rate and reverse repo rates which are linked to the repo rate has also been lowered accordingly. The repo rate and reverse repo rate now stands at a near two decadal low.

The RBI also extended the earlier announced relaxation (announced in the last 2 months) for debt servicing and compliances. It also announced measures to support exports and imports including providing a line of credit for EXIM banks, increased the group exposure limit and measures to ease the stress of state governments.

The MPC took note that the two months of COVID-19 induced lockdown has had severe ramifications on economic activities and financing conditions across all segments and this called for an easing in financing conditions and a reduction in policy rate. While all members of MPC voted for a reduction in repo rate, 5 were in favour of a cut of 40 bps while one member voted for a reduction in repo rate by 25 bps

The MPC stated that there still remains policy space for future actions. The RBI only gave directional guidance on inflation and economic growth and refrained from giving any numerical projections amidst high uncertainty surrounding the pandemic. Though the outlook of inflation is highly uncertain the headline inflation is expected to remain below target in H2. Economic growth is expected to contract in FY21 with prominent downside risks.

We had lowered its GDP growth projections for FY21 to -1.5-1.6% earlier this week in our Report – Road to Recovery.

RBI’s Assessment on global and domestic economy

Global scenario

 Domestic scenario

RBI’s outlook on inflation and economic growth

The RBI has given only directional guidance on the inflation trajectory and economic growth due to high uncertainty surrounding COVID-19 pandemic.


Headline inflation could be below 4% target in Q3 and Q4 FY21

Economic growth

MPC noted that the macroeconomic impact is more severe than earlier anticipated. Various sectors are under stress due to supply disruptions and low demand.

GDP growth in FY21 is expected to remain in a negative territory

Developmental and regulatory policies

The statement of regulatory and development policies includes measures which broadly focuses on improving the functioning of the financial markets, support to export and imports, ease financial stress caused by COVID-19 and steps to ease financial constraints faced by the state governments.

I. Measures to improve functioning of the markets:

II. Measures to support export and imports

Export credit: The RBI has permitted an increase in the maximum permissible period of pre-shipment and postshipment export credit sanctioned by banks from existing 1 year to 15 months for all the disbursements made up to July 31, 2020

Liquidity facility for EXIM banks:

The RBI has decided to extend a line of credit of Rs 15,000 crs to EXIM bank for 90 days (with a rollover of maximum 1 year) with a view to enable the bank to avail US dollar swap facilities to meet its foreign exchange requirements.

Extension of time for payment for imports:

The RBI has extended the period for completion of remittances against normal imports into India (except in cases where amounts are withheld towards guarantee) from 6 months to 12 months from the date of shipments made on or before July 31, 2020.

111Measures to ease finance stress

IV. Ease financial stress of state governments

Relaxation in the rules governing the withdrawals of funds from the CSF of states, which is maintained by states as a reserve fund for the amortization of their debt obligations. The relaxation offered (till 31 March 2021) will release an additional amount of Rs 13,300 crs is expected to help States meet about 45% of their redemption for FY21. As of end March’20, a total of Rs.1.34 lakh crores was being maintained by different states/UTs with the RBI. Among states, Maharashtra has the highest reserves at around Rs.40,000 crs, followed.

CARE Ratings View

On the whole the measures of the RBI are extremely supportive of the ‘revival’ process that was sparked by the government last week with a series of reforms announced. The policy lowers the cost of funds and also points out that the transmission has been quite satisfactory of late. As activity has come to a virtual standstill companies would still not be able to service their debt and hence the moratorium has been extended. The same has been done for the earlier announced measures on working capital limits. All this will provide support to firms in these challenging times. The response of banks and borrowers would be interesting and determine how quickly the revival takes place. Further we could expect another rate cut during the year as conditions evolve.


Kavita Chacko, Senior Economist

Dr. Rucha Ranadive, Economist

Sushant Hede, Associate Economist


Rachna Gupta, Manager – Training


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