VR Logo

Govt, RBI launch Economic Stimulus 2.0

The RBI cut key rates and the government announced a range of steps to get growth goimg again

The government launched its second attempt to stimulate the economy into growing faster. Simultaneously, the Reserve Bank has lowered two key rates to help get more credit flowing through the economy. The repo and the reserve repo rate under the liquidity adjustment facility (LAF) has been cut by 1 per cent while the cash reserve ratio (CRR) has been reduced by 0.5 per cent. The reverse repo rate is now 4 per cent, the repo rate at 5.5 per cent and the CRR at 5 per cent. The CRR cut will effectively make about Rs 20,000 crore available banks. It remains to be seen how much of this the banks will actually use for fresh credit.

Other major steps announced this evening are:

  1. FII investment limit in rupee denominated corporate bonds increased from $6 bn to $15 bn.
  2. The 'all-in-cost' ceilings on external commercial borrowings (ECBs) removed
  3. Development of integrated townships would be permitted as an eligible end-use of the ECB
  4. NBFCs dealing exclusively with infrastructure financing permitted to access ECB from multilateral or bilateral financial institutions
  5. A Special Purpose Vehicle will be designated shortly to provide liquidity support against investment grade paper to Non Banking Finance Companies (NBFCs) fulfilling certain conditions. The scale of liquidity potentially available through this window is Rs.25,000 crores, although details are yet to be announced.
  6. An arrangement will be worked out with leading Public Sector Banks to provide a line of credit to NBFCs specifically for financing commercial vehicles.
  7. Credit targets of Public Sector Banks are being revised upward to reflect the needs of the economy in the present difficult situation. Government will closely monitor, on a fortnightly basis, the provision of sectoral credit by public sector banks.
  8. States will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP) for capital expenditures. This would amount to about Rs 30,000 crore.
  9. India Infrastructure Finance Company (IIFCL), which has already been authorized to raise Rs.10,000 cr. through tax free bonds by 31st March '09 for refinancing bank lending of longer maturity to eligible infrastructure bid based PPP projects, will be accessing the market next week for raising the first tranche of the amount. This will enable the funding of mainly highways and port projects on hand of about Rs.25,000 crore. To fund additional projects of about Rs.75,000 crore at competitive rates over the next 18 months, IIFCL is being enabled to access in tranches an additional Rs.30,000 crores by way of tax free bonds once funds raised in the current year are effectively utilised.

Apart from these, there are also measures to help exporters and some duty changes.