A mammoth task on the government’s shoulder is to protect India’s ₹2.7 trillion economy that is facing the threat of shut down due to coronavirus. Markets are facing a massive demand slump. RBI has, therefore, decided to infuse liquidity into the market to cope with the slowing demand. Complete Coverage: Coronavirus
Crux of the Matter
RBI’s Measures Due to coronavirus, markets and industries across the world are facing a massive slump in demand. In India, RBI has decided to pump ₹10,000 crores into the market via Open Market Operations (OMO) – buying back government securities – to increase liquidity and monetary transmission. In addition to this, RBI has also announced up to ₹1 trillion in long-term repo operations in multiple tranches, besides a $2 billion dollar swap, in which it will buy dollars from the market now and sell it six months from now, increasing the flow of rupee in the Indian economy.
RBI: Public can use these modes of digital payment from the convenience of their homes through online channels like mobile banking, internet banking, cards, etc. and avoid using cash which may require going to crowded places for sending money or paying bills. #Coronavirus https://t.co/VmqDVK65mp — ANI (@ANI) March 16, 2020
The main focus of the Government is to keep the economy running without falling into a financial crisis. The small and medium-sized businesses (MSMEs) employ more than 100 million people and account for 45% of factory output and contribute 40% of the nation’s export. Thus, the Finance Ministry has reconsidered the repay terms of borrowed loans and interest rates for MSMEs. Loan tenors for MSMEs are also extended.
NPAs Hindering RBI’s Measures On the other hand, the Indian financial sector especially banks are struggling because of high Non-Performing Assets (NPAs). Amid coronavirus threat, Indian banks are worried about a fresh spike in bad loans and thus have appealed to the government to ease the bad-debt classification criteria for the time being. The Indian banking sector is still healing from the bruises of Yes Bank debacle.
Curiopedia
Non-performing Assets – A non-performing asset (NPA) refers to a classification for loans or advances that are in default or in arrears. A loan is in arrears when principal or interest payments are late or missed. A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations. More Info
Market Liquidity – In business, economics or investment, market liquidity is a market’s feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset’s price. Liquidity is about how big the trade-off is between the speed of the sale and the price it can be sold for. In a liquid market, the trade-off is mild: selling quickly will not reduce the price much. In a relatively illiquid market, selling it quickly will require cutting its price by some amount. Money, or cash, is the most liquid asset, because it can be “sold” for goods and services instantly with no loss of value. There is no wait for a suitable buyer of the cash. There is no trade-off between speed and value. It can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs. More Info
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