The Reserve Bank of India (RBI) finally bit the bullet on Friday and responded to the coronavirus-induced crisis with a whopping 75 basis points cut in the repo rate, bringing it down to 4.4 per cent.
The repo rate has thus fallen to the lowest ever. Before this, it had hit the lowest point of 4.74% in April 2009 in the wake of the Global Financial Crisis.
The central bank also cut the cash reserve ratio or CRR by 100 basis points to 3 per cent with effect from March 28, unlocking Rs 1.37 lakh crore primary liquidity in the banking system. The reverse repo rate, too, was lowered by 90 basis points.
Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. Monetary authorities use this to control money supply in the economy, thereby inflation.
The reverse repo rate is the rate at which RBI borrows funds from commercial banks. It is the rate at which commercial banks in India park their excess money with RBI usually for the short term.
CRR or cash reserve ratio is the percentage of total deposits that banks are required to keep in reserves either in the vaults or with RBI so that the same can be given to bank’s customers if the need arises. Banks do not get any interest on this money. It is one of the major weapons in RBI’s arsenal that allows it to maintain a desired level of inflation, control money supply and liquidity in the economy. The lower the CRR, the higher liquidity with banks, which in turn goes into investment and ..
The central bank advanced the policy review and the Monetary Policy Committee met over March 24, 25 and 26 to analyse the situation caused by the unprecedented lockdown of the nation and all business activities, before responding with the massive rate cut.
The rate cut was warranted by disruptive force of coronavirus, the central bank said. Four of six monetary policy committee member voted in favour of the rate cut.
"We need to be always battle ready," Governor Shaktikanta Das said in a statement, adding that "tough times never last." The Governor added that RBI was at work and is on a mission mode and will ensure the normal functioning of the markets.
Reacting to the RBI announcement, the Finance Minister said the rate cut will to encourage growth and ensure financial stability.
"Time has come for RBI to unleash an array of instruments to expand liquidity in the system sizeably and to improve monetary transmission," the FM said.
RBI also allowed banks and other lending institutions to extend the repayment schedule and moratorium by three months to avoid large NPAs and reduce risk weights. This would apply to all term loans as RBI also allowed all lending institutions to allow a moratorium up to three months for all loans outstanding as at March 1, 2020.
Large selloff in equity and bond markets has intensified redemptions, Das said, adding that "time has come for RBI to unleash an array of instruments from its arsen ..
"It is important to mitigate burden of debt servicing now," the RBI Governor said.
He said liquidity distribution remains asymmetrical in the economy, but asserted that the Indian banking system remained safe and sound. "It would be fallacious to link share price movements to the safety of deposits," he said.
“RBI has surpassed expectations by delivering more than what the market anticipated, and its promise to 'do whatever it takes' has come good,” said Rahul Bajoria, Chief India Economist, Barclays.
“The steps to ease working capital pain, reduce liquidity costs and provide moratorium on term loans will alleviate stress across various sectors. We continue to see rates dropping to 3.50% by August 2020,” he said.
Over the past few days, the central bank has taken aggressive liquidity management measures, infusing some Rs 3.80 lakh crore liquidity into the system through various repo measures undertaken on a regular basis. On Friday, the central bank was conducting a record Rs.3.5 lakh crore reverse repo exercise, aiming to correct the anomalies between two overnight interest rates.
Friday’s variable reverse repo auction would allow banks to park their excess cash in the system, sloshed with about Rs 2.60 lakh crore of liquidity. The tenor of these auctions will be 13 days. So, banks will earn interest on the money they park for the period.
Source:- economictimes.indiatimes.com