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MID-TERM ASSIGNMEMT’

RESEARCH PAPER

‘FINANCIAL MARKET REGULATION


I SEMESTER- III YEAR

TITLE:
“RBI’s STRATEGIC MEASURES DURING THE TIME
OF COVID-19: INDIA”

SUBMITTED TO:
PROF. MANMEET KAUR

SUBMITTED BY:
SHREYA MAHAJAN
B.A Hons in Legal Studies (21011910)

O.P JINDAL GLOBAL UNIVERSITY


SONIPAT, HARYANA
“RBI’s STRATEGIC MEASURES DURING THE TIME
OF COVID-19: INDIA”

INTRODUCTION

The years 2020–2021 have been extremely difficult for both our country and all other
countries in the world. These were the years when the COVID-19 pandemic decimated our
nation's economy. Numerous industries and regions were affected by the COVID-19
pandemic in India, including tourism, aviation, the banking industry, education, employment,
healthcare, finance, commerce, and GDP. Due of this outbreak, there was a nationwide
lockdown in March 2020, which severely disrupted the country's economy. India's economy
was in the worst shape it has been in since the country's independence during the pandemic;
in the years from 2020 to 2021, its GDP growth decreased by 7.3%1. Along with this decline
in GDP, India perceived the issue of the economy's recession as the result of a lockdown in
which all businesses were closed and people's sources of income were taken away, thus
wrecking the money flow in the market.

In its "Report on Currency and Finance (RCF)," the Reserve Bank of India (RBI) also stated
that "due to the impact of the COVID-19, India's economy may take a decade to overcome
the losses." 2 And the Indian government and RBI collaborated to bring many steps to address
the epidemic in order to tackle this recessionary circumstance. This paper will cover the steps
taken by the RBI to strategically manage the COVID's effects in great detail.

MEASURES TAKEN BY THE RBI

As a monetary authority, financial system regulator, currency issuer, liquidity manager, and
banker to the government and other banks, the Reserve Bank of India (RBI) had a
responsibility to the country's economy. To address the pandemic situation and its effects on
the economy, the RBI introduced fiscal, monetary, structural, financial, and containment
measures; however, this paper will focus exclusively on the monetary ones.

The measures which RBI brought are as follows:


The measures were Policy Rates (repo rate and reverse repo rate), Cash Reserve Ratio, Loan
Moratorium, Long term Repo Operations (LTRO), Targeted Long-Term Repo Operations
(TLTRO), Marginal Standing Facility (MSF) and, the Open Market Operations (OMO) and
these are the measures which will be discussed in the paper further in great detail.

1
Mohan, R. (2021). ‘The Response of the Reserve Bank of India to Covid-19: Do whatever it takes’, Centre for
Economic Policy Research, (June), pp. 5-16.
2
Special Correspondent (2022). ‘Economy may take more than a decade to overcome COVID-19 losses: RBI
report’, The Hindu, 29 April. Available at: https://www.thehindu.com/business/Economy/economy-may-take-
more-than-a-decade-to-overcome-covid-19-losses-rbi-report/article65367945.ece (Accessed: 26 September
2023).
In addition to stabilizing the Indian economy, the RBI introduced these steps to pump
liquidity into the market in order to control the economic situation and give people the means
to pay for essential necessities like food and healthcare during these trying times.

SOURCE: NEWSPAPER SOURCE: THE RESERVE BANK OF INDIA

POLICY RATES:
The policy rates include the REPO RATE and the REVERSE REPO RATE, In the wake of
the COVID-19 pandemic RBI to handle the recession during those times, cut both the policy
rates with some basis points3 (bps).

Source: RBI

REPO RATE:
3
1 bps= 1/100 i.e., 0.01
Repo Rate refers to the interest rate at which the RBI lends or loans money to commercial
banks. In order to increase the country's money supply during COVID-19, the RBI reduced
the repo rate by 75 basis points, from 5.15% to 4.40%.4 The repo rate was reduced to a low
level to encourage commercial banks to borrow money from the RBI at lower interest rates
and utilize those loans to lend money to clients, so increasing the amount of money available
in the market, reviving the economy, and promoting growth.

REVERSE REPO RATE:


The reverse repo rate refers to the interest rate at which the country's central bank lends or
loans money from the commercial banks. The Monetary Policy Committee (MPC) at the time
of the meeting by 4:2 majority resolved to reduce the ratio of reverse repo rate by 90 basis
points to 4% 5 in the wake of the pandemic. This was done to make sure that commercial
banks didn't hoard their extra liquidity for themselves but instead encouraged lending to keep
the market's money flow active and help in stabilizing the money supply chain along with the
central bank of the India (RBI).

LOAN MORATORIUM:
The borrowers and the businesses were dealing with severe cash flow issues at the time of the
COVID because of income reductions or loss of income as a result of business closure.
Therefore, the RBI introduced the Loan Moratorium as a new approach to make it easier for
these individuals to repay debts. This gave borrowers some more time to return their loans
while maintaining an unaffected loan account and credit score.

From 1st March 2020 to 31st May 2020, the RBI allowed banks and NBFCs to impose a
further 3-month moratorium on loan EMI payments. On May 22, 2020, the RBI extended the
embargo for an additional 3-months, from 1 June to 31 July 2020 making it a total of 6-
months of moratorium period. 6

We need to keep in mind that the Loan Moratorium is not an "EMI Wavier" it simply
postponed your installment as cumulative interest of the months of your moratorium period.
This moratorium facility is beneficial for people who are actually facing the problem of cash
flows because for people with no cash flow issues this facility is of no benefit. Individuals or
businesses who have taken out any kind of loan, be it a home loan, car loan, or credit loan,
may avail of this facility and “it provides stressed customers extra time to repay without
their accounts being labelled non-performing assets (NPA) or their credit score being
affected - a major worry for small and medium businesses.”7

4
Rao, S.K. (2021). ‘RBI efforts towards ‘Pandexit’ go beyond policy measures’, Economic & Political Weekly,
Commentary. 42, pp. 13-15.
5
Rao, S.K. (2021). ‘RBI efforts towards ‘Pandexit’ go beyond policy measures’, Economic & Political Weekly,
Commentary. 42, pp. 13-15.
6
The Reserve Bank of India Press Releases (March 27, 2020)
7
‘RBI’S COVID-19 Economic Relief Package’, Drishti IAS blog, 28 March.
Source: made by me; this depicts the moratorium facility through a diagram.

CASH RESERVE RATIO:


The cash reserve ratio (CRR) is certain percentage of the NDTL (Net Demand & Time
liabilities) that has to be deposited to RBI from the commercial banks in form of cash. At
time of COVID the ‘RBI has also cut the CRR heavily by 100 bps to 3% of the NDTL with
effect from March 2020’8. This was done to inject liquidity in the market by controlling the
problem of recession.

MARGINAL STANDING FACILITY:


Under Marginal standing facility (MSF) banks can take loans from RBI by lending
government securities from SLR quota as a collateral. “The RBI made banks' maximum
overnight borrowing amount into the Statutory Liquidity Ratio (SLR) risen from 2% to 3%.”9

8
The Reserve Bank of India Press Releases (March 27, 2020)
9
The Reserve Bank of India Press Releases (March 27, 2020)
So, this will increase money, demand and inflation in economy and will result in injecting
liquidity in the market. “This will make INR 1.37 lakh crore more liquid available.” 10

LONG-TERM REPO OPERATIONS (LTRO):


To resolve the issue of liquidity crunch at the time of COVID the RBI brought a new
initiatives for the banks that i.e., the long-term repo operations. If banks want to take loan
from RBI the minimum bid is 1cr and maximum bid is notified amount of the auction.

SOURCE: MADE BY ME
The diagram presented above depicts the LTRO facility, like how early at R.R short term
loans were given but here the long-term loans are given, and it is a tool which allows banks to
borrow funds from RBI for tenure of 1-3 years at policy repo rate, against government
securities as a collateral. This allows bank to use the borrowed money for longer period of
time to lend loans in the market and maintain the money flow.

10
The Reserve Bank of India Press Releases (March 27, 2020)
TARGETED LONG-TERM REPO OPERATIONS (TLTRO):
During the pandemic the NBFC’s11 were also in need of money supply but the RBI can’t
directly lend money to these companies, the RBI came up with a new initiative to help these
companies from going bankrupt named TLTRO.

Source: MADE BY ME

This diagram depicts the procedure and the purpose of the TLTRO. Along with that in
TLTRO interest rate is not fixed there is floating rate linked to repo rate, and it is a great tool
to enhance liquidity in the system.

OPEN MARKET OPERATIONS (OMO):

11
Non- Banking Financial Companies
The RBI also carried out these open market operations to change the INR's liquidity
condition12s. OMO is the term used to describe the central bank's selling and purchase of
government securities in the open market on behalf of the government.

Source: MADE BY ME

This diagram depicts how RBI use OMO to control the problem of inflation and recession
and how during the pandemic by using the OMO the RBI injected liquidity in the market.

These where the monatery measures which RBI took to handle the situation of COVID-19
and its impact and to revive the economy and encouraging the growth.

CONCLUSION

12
The Reserve Bank of India Press Releases (March 27, 2020)
To summarize my paper, I would say that the RBI's efforts to resurrect the
economy were really well-considered ones that actually helped a nation like
India, which has one of the world's largest populations, covid cases and a
history of economic hardship, to resurrect its economy. Our country was able to
manage the situation both during the pandemic and after it had passed, even
after two years, three waves of the virus, and 'n' number of lockdown. This was
made possible by the measures that the country had adopted during those trying
times, and the people responsible for those measures were none other than the
RBI and the government.

This graph shows how in end of 2021 the country was able to increase its GDP growth to
17.6% and this was all made possible by the measures introduced by the RBI and great
implementation of those measures which resulted in stabilizing the situation of recession and
encouraging development and growth of the economy.

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