The Reserve Bank of India kept its powder dry in the third review of the monetary policy since the COVID-19 pandemic spread in the country, leaving key policy rates unchanged in the face of rising inflation pressures but asserted that propping up economic recovery has assumed “primacy” in the “worst peace-time health and economic crisis of the last 100 years”.
The central bank didn’t extend the moratorium on loan repayments offered to borrowers beyond August 31 but allowed banks to restructure loans from large corporates, micro, small and medium enterprises as well as individuals to help stem the rising stress on incomes and balance sheets.
These restructuring efforts may or may not include a moratorium on instalment repayments, the RBI said, leaving the decision to banks, with an eye on averting such loans from slipping into non-performing assets.
“A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities. This can potentially impact their long-term viability and pose significant financial stability risks if it becomes widespread,” RBI Governor Shaktikanta Das said after a three-day meeting of the Monetary Policy Committee.
With incomes and jobs taking a hit across sectors, the RBI has allowed banks to restructure individual borrowers’ loans by December 31, 2020, permitting a maximum extension of two years.
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Limits for loans against gold were also enhanced.
India’s GDP is set to contract in 2020-21, and inflation remains a bugbear, thanks to supply chain disruptions across sectors along with a sticky surge in food prices. Consumer confidence turned more pessimistic in July than previous surveys by the RBI, so demand is expected to remain anaemic, Mr. Das said.
“While space for further monetary policy action is available, it is important to use it judiciously to maximise the beneficial effects for underlying economic activity,” he added.