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Central bank (RBI) measures to prop up economy, ease lending

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An Indian naval officer walks past the logo of the Central Bank of India, the Reserve Bank of India (RBI), in Mumbai on November 9, 2016.

Punit Paranjpe | AFP | Getty Images

Indian bank stocks rose on Wednesday after the central bank took measures to boost lending as the coronavirus crisis continues to affect the country.

The Nifty Bank Index rose 1.35% while the Nifty PSU Index, which tracks the performance of India’s public sector banks, rose 1.8%. They outperformed the Nifty 50 benchmark, which only gained 0.7%.

The big lenders’ stocks jumped after the announcement and have given up some gains since then. Bank of Baroda was up 2.63%, IndusInd Bank was up 2.51%, HDFC Bank was up 1.47%, Axis Bank was up more than 2%, while State Bank of India gained 1.28%.

The RBI announces measures to facilitate lending

The Reserve Bank of India will monitor the economic impact of the second wave of Covid-19 infections in India and use all resources to reduce the economic stress, Governor Shaktikanta Das said in an unscheduled speech on Wednesday.

His announcement came as India passed another dire milestone on Wednesday. Coronavirus deaths rose a record 3,780 in the past 24 hours, with more than 226,000 total deaths reported, according to the latest data from the Health Department. On Tuesday, India became the second country after the US to go through 20 million reported cases.

The central bank governor announced plans to inject 500 billion rupees ($ 6.78 billion) in liquidity to facilitate access to emergency services. The move would allow commercial banks to borrow money from the central bank through repurchase agreements or repos and lend it to companies related to Covid-19.

To improve the provision of immediate liquidity for expanding health infrastructure and services related to Covid in the country, the central bank is repoing a liquidity window of 500 billion rupees ($ 6.78 billion) with a term of up to three years – Set that will be available through March 31, 2022, Das said.

The repo rate is the key interest rate at which RBI grants loans to commercial banks. It is currently 4%.

The explained that banks will be able to make new loans under the program to a variety of companies and institutions, including vaccine manufacturers, importers and suppliers of vaccines and Covid-related drugs, and manufacturers and suppliers of oxygen and ventilators.

Banks could lend to borrowers directly or through intermediary financial institutions regulated by the central bank, and lenders are expected to create a “Covid loan book” under the system, the central bank governor said.

The RBI also announced other measures aimed at helping India’s micro, small and medium-sized enterprises, as well as grassroots financial firms, who are carrying the “biggest brunt” of the second wave of infections. This includes allowing certain small borrowers to extend their repayment deadline – provided they haven’t restructured their loans in the past year and were classified as “Standard” accounts as of March 31st.

Uncertain economic recovery

The South Asian nation is currently facing a devastating second wave that has forced several states into lockdowns while others have tightened social restrictions. On Tuesday, India exceeded 20 million Covid-19 cases and the official death toll topped 222,000 deaths.

Economists have warned that the ongoing crisis is likely to delay India’s economic recovery. Last year, a two-month national lockdown hurt growth and pushed the South Asian economy into a technical recession.

Local media reports, citing sources, reported that banks had sought relief measures from the RBI to help borrowers fight the second wave of Covid-19 and relieve lenders’ balance sheets in the face of a possible spike in non-performing loans.

This also met virtually on Monday with CEOs and managing directors of selected non-bank financial institutions and microfinance institutions to discuss, among other things, the potential burden on the balance sheets of these companies.

The Indian central bank last cut its repo rate in May 2020 during an emergency meeting to counter the economic ramifications of the month’s monthly lockdown.

The RBI cut the repo rate by 40 basis points in May and by 75 basis points in March of last year, and cut the key interest rate by 115 basis points in 2020. In 2019, the central bank cut interest rates by 135 basis points.

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Robert Dunfee