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Last updated: 26 May, 2020  

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Bikky Khosla | 25 May, 2020

The Reserve Bank of India last week reduced lending rates by 40 basis points to 4 percent from 4.40 percent after a yet another out-of-turn Monetary Policy Committee meeting. Taken amid the ongoing COVID-19 crisis, the step is aimed at mitigating the combined impact of demand compression and supply-side disruption caused by the nationwide lockdown. Apart from repo rate cut, some other major decisions have also been announced, raising expectation that they will augur well for the economy.

Though, these days, there not many investment proposals on the anvil, the rate cut decision is expected to boost sentiment, while another decision – extension of the moratorium on interest payments on all term loans for another three months – is likely to benefit a large number of commercial borrowers. Deferment of payment of interest on working capital loans is another welcome decision. Similarly, easing of withdrawal rules of a consolidated sinking fund maintained by states will help them service their debt.

There is good news also for exporters and importers. Pre and post shipment credit for the exports sector is now extended from existing 12 months to 15 months which will provide a much-needed relief by allowing them more liquidity. On the other hand, extension of onward remittance for imports from 6 months to 12 months will benefit them by allowing them longer repatriation period. The RBI has also extended a credit line of Rs 15,000 crore to EXIM Bank to enable it to avail a U.S. dollar swap facility.

Making the announcements, the RBI said that the macroeconomic impact of the pandemic is turning out to be more severe than previously thought, and it has taken the latest steps to instil confidence and ease financial conditions further. In fact, since the lockdown began the central bank has cut 1.15 percentage points from the rate chart, and it is widely expected that our lending institutions will now shed their reticence. Also, adequate fiscal measures are needed to ensure efficacy of these monetary measures.

I invite your opinions.

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