Relief
Measures to Tackle the Covid19 Crisis
THE
GLOBAL ECONOMY is facing an unprecedented crisis from the spread of
Covid-19 throughout almost the entire world. The RBI noted that
global economic activity has come to a near standstill as COVID-19
related lockdowns and social distancing are imposed across a widening
swathe of affected countries. Expectations of a shallow recovery in
2020 from 2019’s decade low in global growth have been dashed. The
outlook is now heavily contingent upon the intensity, spread and
duration of the pandemic. There is a rising probability that large
parts of the global economy will slip into recession. Even as
scientists and doctors fight the battle with the unprecedented
calamity, fiscal and monetary will have to take care of saving
livelihoods and incomes. Below we outline some of the initial
measures undertaken by some major central banks and
governments.
UNITED
STATES
•
Fed
funds rate at 0-0.25%. FOMC announced emergency rate cuts on March 3
and March 15, lowering the policy rate by -150 bps in total. The Fed
funds rate range has returned to the lowest level after the global
financial crisis in 2007/08.
•
Donald
Trump signed the largest stimulus package in US history on Friday, a
$2 trillion bill intended to rescue the coronavirus-battered economy.
The package provides roughly $500 billion in loans and other
assistance for major companies
•
The
bill sets aside $350 billion for small business loans up to $10
million, with priority given to women-owned businesses, new
businesses and those run by anyone “socially and economically
disadvantaged.
•
The
bill also sets aside $100 billion for hospitals and health providers
as they struggle to meet the challenge of COVID-19 amid widespread
shortages of personal protective equipment and depleted staffs.
•
The
bill also includes a substantial additional $600 per week on top of
existing state benefits to help the jobless navigate the crisis.
Nearly one in five Americans had lost work as of mid-March — a
number that’s likely going up.
•
The
stimulus will include direct cash payments of $1,200 for adults and
$500 for children in a move likely to include up to 94% of all tax
filers.
•
The
Fed has also revived the Term Asset-Backed Securities Loan Facility
that focuses on small businesses and households. It provides direct
funding to those willing to invest in financial instrument
securitisations
•
On
March 22, the U.S. Fed announced the Primary Market Corporate Credit
Facility and a Secondary Market Corporate Credit Facility, that will
support access to credit for large employers via the purchase of
corporate debt.
EUROPE
At
the March meeting, ECB left the deposit rate unchanged at -0.5%.
On
March 18, the European Central Bank announced its Pandemic Emergency
Purchase Programme. The significance of the PEPP is not just its
massive corpus of €750 billion, but the fact that it has extended
the list of eligible securities to all commercial paper of financial
and non-financial companies. Thus, the European Central Bank would,
in effect, be a direct lender to companies to meet their working
capital needs.
The
ECB has relaxed capital requirements for the sector — providing an
estimated €120bn of capital relief that could fund €1.8tn of new
loans. T
ECB
launched new LTROs until June 2020 to fund banks’ liquidity needs.
It also improved TLTRO-III by relaxing loan eligibility and
increasing incentive rate, effective June 2020.
he
ECB also said banks “should not pay dividends for the financial
years 2019 and 2020 until at least 1 October 2020”. It added that
they should “refrain from share buybacks aimed at remunerating
shareholders”. The freeze on distributing capital to
investors was to “boost banks’ capacity by about 30 billion Euros
to absorb losses and support lending to households, small businesses
and corporates during the pandemic.
UNITED
KINGDOM
Bank
of England Policymakers lowered the Bank rate by -65 bps in two
emergency cuts this month, taking the policy rate to 0.1%, the lowest
level on record.
Boosting
the size of asset purchase by +200B pound, BOE has pledged to buy a
total of 645 billion pound.
BOE
also introduced a COVID-19 Corporate Financing Facility (CCFF) under
which the central bank can directly purchases commercial paper issued
by credit-worthy non-financial corporate who make “a material
contribution to the UK economy”
JAPAN
Japan
compiled a record $1.1 trillion economic stimulus package in April
that focused on cash payouts to households and loans to small
businesses hurt by the pandemic.
INDIA
In
India, fiscal policy makers have taken the first step of ensuring
that the basic needs of most-vulnerable sections of the population
are met during the lock-down:
·
1. Pradhan
Mantri Gareeb Kalyan Anna Yojana: 800
million poor people in the country to get 5 kg of rice/wheat per
month free of cost, in addition to the 5 kg they already get.
Additionally, each household to get 1 kg of preferred dal for
free for the next three months
·
2. Cash
transfer scheme: Nine
sub-parts
·
Farmers:
First instalment of the PM-KISAN payment of Rs 2,000 to be
frontloaded; move to benefit 87 million
·
MGNREGS:
Wage increased from Rs 182 to Rs 202 per day. Wage increase to
benefit 50 million families, as there will be about 2000 increase in
their income
·
Poor widows,
aged, and divyang:
Ex-gratia of Rs 1,000 for the next three months, in two instalments.
30 million people to benefit. transfers to be done through direct
benefits transfer (DBT)
·
Women with Jan
Dhan Yojana accounts:
200 million to benefit from Rs 500 ex-gratia for the next 3 months
·
Beneficiaries
of the Ujjwala scheme:
80 million households benefitted from the gas cylinders provided
under the scheme. These beneficiaries will get free cylinders for
three months in view of the disruption the coronavirus lockdown
will cause.
·
Women in
self-help groups:
6.3 million SHGs get up to Rs 10 lakh collateral-free loans under the
Deen Dayal Upadhyaya National Rural Mission scheme. The cap has been
doubled to Rs 20 lakh. The move will benefit 70 million households
·
Organised
sector workers: Two
parts to this. First, the Government of India will pay the EPF
contribution of both employee and employer for the next three months.
This will be for all those establishments which have up to 100
employees, 90 per cent of whom earn less than Rs 15,000 a month
·
And second, in
what will benefit 8 million employees and 400,000 establishments, the
EPFO regulation will be amended to allow the withdrawal of up to 75
per cent of their corpus as non-refundable advance, or three months'
salary, whichever is less
·
Construction
workers:
States to be directed to utilise the Rs 31,000 crore welfare fund for
building and construction workers for the benefit of 35 million
workers in the midst of the coronavirus crisis
·
District
medical fund:
State govts to be urged to utilise this fund for medical screening,
medical testing and providing health care services in the wake of
the coronavirus crisis
The
government is giving shape to a stimulus package that will
be followed by a raft of reforms meant to help India capture
opportunities. Business leaders and experts have sought a ₹10
trillion package to tide over a severe liquidity crisis caused by the
lockdown imposed to battle covid-19 and provide funds to the poor for
a recovery in demand for goods and services.
The
Reserve Bank’s actions are to be regarded as a comprehensive
package with force multipliers. The developmental and regulatory
policies can be broadly delineated under four categories: (1)
measures to expand liquidity in the system sizeably to ensure that
financial markets and institutions are able to function normally in
the face of COVID-19 related dislocations; (2) steps to reinforce
monetary transmission so that bank credit flows on easier terms are
sustained to all those who have been affected by the pandemic; (3)
efforts to ease financial stress caused by COVID-19 disruptions by
relaxing repayment pressures and improving access to working capital;
and (4) endeavor to improve the functioning of markets in view of the
high volatility experienced with the onset and spread of the
pandemic.
MPC
has agreed to reduce the policy repo rate by 75 basis points to 4.4
per cent. Policy rate corridor widened from 50 basis points to 65
bps. The fixed rate reverse repo rate, which sets the floor of the
liquidity adjustment facility (LAF) corridor, was reduced by 90 basis
points to 4.0 per cent, thus creating an asymmetrical corridor. The
purpose of this measure relating to reverse repo rate is to make it
relatively unattractive for banks to passively deposit funds with the
Reserve Bank and instead, to use these funds for on-lending to
productive sectors of the economy. On April 15, the amount
absorbed under reverse repo operations was ₹6.9 lakh crore. In
order to encourage banks to deploy these surplus funds in investments
and loans in productive sectors of the economy, it has been decided
to reduce the fixed rate reverse repo rate under the liquidity
adjustment facility (LAF) by 25 basis points from 4.0 per cent to
3.75 per cent with immediate effect. The policy repo rate remains
unchanged at 4.40 per cent, and the marginal standing facility rate
and the Bank Rate remain unchanged at 4.65 per cent.
As
announced on March 27, the RBI undertook three auctions of targeted
long term repo operations (TLTRO), injecting cumulatively ₹75,041
crore to ease liquidity constraints in the banking system and
de-stress financial markets. Another TLTRO auction of ₹25,000 crore
will be conducted on April 17. In response to these auctions,
financial conditions have eased considerably, as reflected in the
spreads on money and bond market instruments. Moreover, activity in
the corporate bond market has picked up appreciably, with several
corporates making new issuances. There are also indications that
redemption pressures faced by mutual funds have moderated. It
has been decided to conduct TLTRO 2.0 for an aggregate amount of
₹50,000 crore, to begin with, in tranches of appropriate sizes. The
funds availed by banks under TLTRO 2.0 should be invested in
investment grade bonds, commercial paper, and non-convertible
debentures of NBFCs, with at least 50 per cent of the total amount
availed going to small and mid-sized NBFCs and MFIs. it has been
decided to provide special refinance facilities for a total amount of
₹50,000 crore to NABARD, SIDBI and NHB to enable them to meet
sectoral credit needs.
It
has now been decided to increase the WMA limit of states by 60 per
cent over and above the level as on March 31, 2020 to provide greater
comfort to the states for undertaking COVID-19 containment and
mitigation efforts, and to plan their market borrowing programmes
better. The increased limit will be available till September 30,
2020.
Consistent
with the globally coordinated action committed to by the Basel
Committee on Banking Supervision to alleviate the impact of Covid-19
on the global banking system, additional regulatory measures are
being announced.
