RBI's Measures: What's In It For You?

In the US, they have a name for the language the Federal Reserve speaks—'Fed-speak'. In India too the central bank speak is riddled with jargon. Every word they say in public is weighed before it is uttered and with every sentence, you are expected to read between the lines. But when a central bank chief, talking about the state of the economy says, "Outlook is highly uncertain and negative," there are no two ways of interpreting it.

Those were the precise words of the Reserve Bank of India (RBI) governor, Shaktikanta Das, in a surprise press conference in Mumbai this morning. He announced a slew of measures to ease the burden on the banks, which are in stress as are the borrowers. This comes a day after the union finance minister Nirmala Sitharaman announced several relief measures for the poorest, farmers and daily wage earners affected by the coronavirus pandemic and the 21-day lockdown.

Some of the main measures that governor Das announced include a reduction in interest rates by 0.75 per cent, a moratorium on loan payments for three months and an increase in the supply of money to the banks so that they can increase their lending. These decisions were taken at a meeting of the RBI's Monetary Policy Committee. This was advanced from early next month to now because of the recession-like conditions and economic uncertainty.

So, what's in it for you and me?

No EMIs for the next three months

Moratorium on payment of term loans means that you don't have to pay your EMIs for the next three months. If most banks decide to apply this it will mean you will have more money in your hands. Not just you. Big and small companies who have their own monthly installments on their debt will heave a sigh of relief. Cash flow in the hands of the companies will mean that they will not resort to drastic measures like job cuts. Since the moratorium is not mandatory, we will need to watch this space.

Will EMIs reduce after three months?

Yes, they will. With the RBI cutting 0.75 per cent on repo rate, the banks will be expected to pass on the benefits to their customers once your EMIs kick-in after three months. In the past one year, the RBI has tweaked a few rules so that the banks pass on the rate-cut benefits to borrowers, as opposed to the practices in the past when the latter took their own time.

Will it affect your FD investments?

Yes. This could be the downside of the rate cut. Since banks will be lending at a lower rate than before, they will have to cut interest rates for the depositors. Many senior citizens who have already been complaining about falling returns on their fixed deposits (FDs) may see their deposits grow at a slower rate than before.

Will the interest rates go down even further, or remain the same or go up after three months?

That's actually tough to predict. It will depend on the epidemic we are confronting. If we get a handle on it and the economic pace picks up, we could be better off, but if the situation worsens, the government and the RBI may have to step in again with more measures. One thing is clear though, this situation is genuinely unprecedented and hence, you cannot expect a textbook response from the RBI.

We can only wait for the next press conference by the RBI governor and hope for a better “outlook” than the one today.