This massive cut has brought down repo rate to 4.4%, which is the lowest ever.
Cuts repo rate by a 75 basis points
This massive cut has brought down repo rate to 4.4%, which is the lowest ever. The previous lowest point for repo rate was 4.74%, which it hit in April 2009 in the wake of the global financial crisis. The 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. When this rate is lowered, banks get more money to lend and interest rates on loan drop.
Lowers reverse repo rate by 90 bps
The central bank also cut the rate at which it borrows funds from commercial banks. In other words, reverse repo is the rate at which commercial banks in India park their excess money with RBI usually for the short term. This latest reverse repo rate cut would mean banks which are not lending and are sitting on idle money will be earning lower interest on this parked cash. This will encourage them to lend that money in the market instead of holding it in reserve.
Cuts CRR by 100 bps to 3%
This move will free up some Rs 1.37 lakh crore out of the money that the banks are mandatorily required to keep in liquid form to meet possible withdrawal demand from depositors. 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. Thus, by lowering the CRR, the RBI is giving banks more money to lend. If they sit on this cash, they will earn lower interest on the same, thus theoretically RBI will be forced to lend more and do so at cheaper interest rates. This will help individuals and industry meet their funding requirement in these times of crisis. It will also help grow demand for certain sectors like real estate, auto and consumer goods, which have been witnessing huge demand squeeze earlier because of the economic slowdown and now due to the coronavirus induced lockdown.
Allows lenders to extend loan moratorium
The central bank allowed banks and other lenders like NBFCs to extend loan repayment schedule and offer moratorium by up to three months. As the lockdown shuts down industrial and business activity, individuals, business and industries all across are expected to see a huge shortage of money as their cash flows dry up, thus forcing them to default or delay repayment of existing loans in banks. It is this scare of a possible sudden surge in loan defaults and NPAs, which caused bank stocks to crash over the past few days. The central bank is not signaling to the banks to go easy on loan repayment and ease the burden on the borrowers so as to avoid building up massive non-performing assets.
Assures depositors their money is safe
There was a huge crisis of confidence and scare in the banking space following the Yes Bank crisis and the coronavirus-induced lockdown, and there were reports that depositors were withdrawing money in bulk from some of the small private banks. This was one of the reasons behind the massive collapse of bank stocks all across in the recent market sell-off. RBI Governor used the occasion to reassure depositors that the Indian banking system remains safe and sound. “It would be fallacious to link share price movements to the safety of deposits,” he said.
The textile industry has welcomed the RBI package. According to Prabhu Damodharan, Convenor, Indian Texpreneurs’ Federation (ITF), “These are bold and decisive announcements from the RBI governor. These measures are much needed at this time.”
Others in the industry believe that these announcements will give relief to corporates, industries, and farmers, and are very aggressive and proactive steps.