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 lowered the reverse repo rate by 90 basis points.
The central bank advanced the policy review and the Moterary 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.
Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control money supply in the economy, thereby inflation.
HIGHLIGHTS: WHAT HAS RBI DONE:
- Cuts repo rate by a whopping 75 basis points to 4.4%, lowest ever
- Lowers reverse repo rate by 90 basis points.
- Cuts CRR by 100 bps to 3%, unlock Rs 1.37 lakh crore liquidity
- Allows banks, other lenders to extend loan repayment schedule and moratorium by 3 months
"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.
Large selloff in equity and bond markets has intensified redumptions, Das said. "Time has come for the RBI to unleash array of instruments from its arsenal to revive growth and preserve financial stability," he added.
The Governor reduced the cash reserve ratio by 100 basis points to 3 per cent with effect from March 28. The move is expected to unlock primary liquidity of Rs 1.37 lakh crore.
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 lending and vice-versa.
The RBI 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.
"It is important to mitigate burden of debt servicing now," RBI said, adding that liquidity distribution has been assymetrical in the economy.
He, however, 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.
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