Under MSF RBI has decided to Extend The Increased Borrowing Limit Till September 30

As a temporary measure for the finance environment of the nation the Reserve Bank Of India had enhanced the borrowing limit under the MSF (Marginal Standing Facility) Scheme of the scheduled banks from 2% to 3% of their Net Demand and Time Liabilities (NDTL) with effect from March 27, 2020. RBI’s decision has been taken between the ongoing adverse economic situation created by the pandemic Coronavirus. This decision has been made for meeting the liquidity shortages of the banks. Thus, by dipping into the Statutory Liquidity Ratio (SLR), the banks can borrow overnight funds under the MSF at their discretion.

Reason Behind the Extension of the Enhanced Borrowing Limit

This relaxation was previously granted till June 30, and then it has been extended to September 30. According to the guidelines under MSF, it is considered a window for banks for borrowing from the RBI (Reserve Bank of India) in an emergency situation when the interbank liquidity dries up completely. Therefore by pledging the government securities at a rate higher than the repo rate, the banks borrow from the central bank under Liquidity Adjustment Facility. Usually, the banks can borrow funds up to 1% of their Net Demand and Time Liabilities (NDTL) under MSF. If we talk about the statutory liquidity ratio, it can be defined as the ratio of the liquid assets to the NDTL. The banks need to maintain a stipulated proportion of their Net Demand and Time Liabilities in liquid assets like gold, cash, and even unencumbered securities, apart from the Cash Reserve Ratio.

Involvement of SLR and MSF in the Decision of RBI

Every alternate Friday of each month, banks need to report the RBI regarding their SLR maintenance and pay penalties that happen due to failing to maintain the SLR as mandated by MSF. The dated securities and treasury bills that are issued under the market stabilization schemes and market borrowing program also form to be the part of the SLR. As per the RBI statement, the extension of the enhanced limit has been decided on a review until September 30, 2020. They also added that the banks might continue to access overnight funds under the MSF against their access SLR (Statutory Liquidity Ratio) holding. Currently, the marginal standing facility rate of the banks stands at 4.25%. RBI has also decided for some other rate extensions for a further period of 3 months till September 25, 2020.

As per this, RBI has extended the relaxation on the minimum daily maintenance of the Cash Reserve Ratio at 80%. The Cash Reserve Ratio (CRR) in India is decided by the Monetary Policy Committee of RBI in the periodic Monetary and Credit Policy. In every monetary policy review conducted at an interval of every six weeks, the RBI takes stock of the CRR. It is one of the primary weapons in the arsenal of RBI. It allows it to control the money supply, maintain a desired level of inflation and also liquidity in the economy. 

Stimulus checks the blessing and the curse waiting to happen.

The Covid-19 pandemic has resulted in the economies of nations across the world to plummet at scales last witnessed during the Great Depression. Governments embarked on implementing measures to restrict social interactions, which saw the closing down of businesses and industries that posed higher risks to the spread of the virus.

 Months later, governments are slowly allowing the reopening of some businesses. Still, millions have a hard time getting back to the new normal, which has been defined by a massive loss of jobs and business, some indefinitely even. 

Policymakers all across the world have implemented economic stimulus measures to guarantee that individuals can meet their basic needs and that businesses can get back up as they open up. Governments are pumping monetary aid into their citizens’ pockets. It is becoming a growing concern among investors that these policies might result in inflationary effects in the not so distant future.

The immediate impact

Buyer spending is a significant part of the demand that drives any economy. Because of the vulnerability brought about by the pandemic and the domino effects, customers have cut spending and increased their savings, businesses are experiencing falling profits and as a result, are reducing costs, and wages are feeling the squeeze. 

This hoarding of money by consumers means that there will be a shift in demand, and supply and demand will do down, resulting in businesses cutting down their products’ costs. While this does sound like a win for the consumer considering they will be paying the bills with unemployment benefits from the government, it is not a win. This is the heralding of a deflationary economy.

In an attempt to cope with the deflation, businesses will likely slash wages and layoff more employees, which will fuel the cycle of inflation, as more would-be purchasers have less to spend.

Weathering the storm

As the world braces for even tougher economic times from the lockdowns, the fiat currency’s inflationary nature is becoming more evident as governments around the world are injecting more fiat into the economy.

So how can individuals do to protect their wealth in times where the fiat is unreliable? Cryptocurrencies. Specifically, Bitcoin (BTC). Central Banks do not control bitcoin, and this dramatically reduces transaction fees incurred from having middlemen.

The other option is gold. Gold isn’t being mined at levels past surrounding utilization. However, a significant value climb would bring out dealers, and there is a great deal of gold out there. All things considered, gold is the most preferred hedge that most people who have a higher probability of losing their wealth opt for as a meant.

The main concern is regardless of whether to broaden your riches further in this incredibly unpredictable times, precious metals are an absolute necessity, and on the off chance that you can get your head around it, bitcoin is an exceptionally ground-breaking alternative. 

While stimulus packages have come in a clutch to many, the impacts will soon start to be felt; individuals ought to look into ways to cushion themselves from the fallout.