RBI brings cheers amidst gloom

■ Injects massive liquidity into system, facilitates credit flow, eases burden of borrowers

In an unprecedented move, the Reserve Bank of India (RBI) on Friday unleashed war efforts to fight Covid19 impact on the economy, bring in financial stability and restore business confidence. The Monetary Policy Committee (MPC) of the RBI cut interest rate sharply to a two-decade low, surpassing market expectations.

In addition, the RBI also announced a series of measures to address the stress in the financial conditions caused by the pandemic such as injecting sizeable liquidity in the financial system, ensuring credit flow, relaxation in repayment and debt servicing pressures for individuals and corporate borrowers and improving the functioning and stability of the financial markets. Temporary compliance relaxations were also announced for the banking sector.

The RBI announcement came days ahead of the MPC meeting that had to be held on March 31 to April 3.

The benchmark repo rate (the rate at which banks borrow short-term money from the central bank) has been cut by a whopping 75 basis points to 4.40 per cent below the global financial crisis level in 2009. The cash reserve ratio (CRR) was cut by 100 basis points to 3 per cent. CRR is the portion of banks deposits that needs to be kept with the RBI.

The cut in the repo rate was accompanied by an asymmetric slicing of the reverse repo rate by 90 bps to 4 per cent in an attempt to dissuade banks from parking money with it and instead divert the money towards the markets.

The measures are expected to bring down the lending rates for new and existing home, auto loan and corporate borrowers.

In another significant move to ease the impact of the coronavirus outbreak on the livelihood of millions of individuals following the lockdown in the country, the central bank said that all commercial banks, including housing finance companies, have been allowed to give a moratorium of three months on the monthly instalments in respect of all term loans outstanding as on March 1, 2020 without any impact on the asset classification downgrade and an impact on borrowers credit score. The move provides huge relief to home loan borrowers, car loans, personal loans, credit card borrowers, MSME and corporate borrowers. Banks are allowed to defer payment of interest rate on working capital loans for three months.

In a video address, Shaktikanta Das, governor, RBI, said the decision to advance the MPC meeting has been warranted by the destructive force of the coronavirus. "We are living through an extraordinary and unprecedented situation. Everything hinges on the depth of the Covid-19 outbreak, its spread and its duration. Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode. Life in the time of Covid-19 has been one of unprecedented loss and isolation. Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do," said Das.

Liquidity to the tune of Rs 3.74 lakh crore would be made available in the banking system on account of the measures announced with regard to targeted long-term repo operations (TLTRO), CRR cut, increased marginal standing facility (MSF) accommodation, said the governor.

All the six members of the MPC voted to cut the policy rate, however in terms of quantum of the rate cut, four members voted for a 75 bps cuts while two member sought a 50 bps cut.