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Demand Intervention Through Liquidity Injections To Aid Economic Recovery, Consumer Sentiment

RBI takes proactive steps to support growth; real estate to benefit from the financial measures

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The measures announced by the RBI today during the MPC meeting complement the economic stimulus package announced earlier by the Central government and Central Bank to restart the economy through liquidity infusion, fiscal support and reform led investments. There is a strong indication by the Bank to kick-start the economy by fueling demand across sectors including Real estate. Given the current grim economic, the environment underlined by weak demand and supply conditions, RBI has acted prudently to revive demand by facilitating cheaper credit and supply through enabling higher liquidity infusion across key sectors.

The 40 bps further reduction in the repo rate only gives more elbow room to banks to reduce mortgage rates in favour of the homebuyers. The repo rate is now at 4.0%, which is lower than the 4.75% rate prevailing during April 2009 - global financial crisis period.  A faster transmission of these benefits to the end consumer in the form of lower home loan rates will aid in improving their effective affordability. Further, the reverse repo rate cut from 3.75% to 3.35% will further disincentivise banks to park the surplus money with RBI, rather inject back into the productive sectors of the economy in the way of higher credit.

The extension of loan moratorium until August 31 will provide the much-needed respite to the corporate sector including real estate developers whose cash flows have been severely impacted due to the pandemic. Banks are also allowed to extend this benefit to NBFCs, which are strapped with short-term liquidity concerns. The Central Bank has also permitted the conversion of the accumulated interest on working capital facilities during the moratorium period into a term loan, which can be paid until March 31 2021. The lending institutions are being permitted to restore the margins for working capital to the original level by March 31, 2021.

Further, the commercial banks have been allowed to raise their group exposure limit from 25% to 30%, which will enable higher flow of credit to the corporate sector including real estate. These measures are significant to tide the short-term working capital challenges faced by the corporates and will give them a breather to focus on restarting their business operations. However, one-time restructuring of loan is the need of the hour more importantly for the real estate sector which is severely ailing due to the pandemic. It is expected that RBI will take a decision soon once it is clear about the lockdown’s impact on the economy and cash flow.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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reserve bank of india repo rate COVID-19

Ramesh Nair

The author is CEO & Country Head- India, JLL

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