The Reserve Bank of India (RBI) may cut the reverse repo rate further as banks continue to increasingly deploy surplus funds with it despite the same being cut twice since March 27 to nudge them to lend. This deployment of funds with RBI is an indication of risk aversion and lack of credit appetite amid the COVID-19 pandemic.
Reverse repo rate, which is the interest rate that the central bank pays banks for parking surplus funds with it, has been cut twice -- from 4.90 per cent to 4 per cent on March 27 and from 4 per cent to 3.75 per cent on April 17 -- to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy.
That banks are awash with liquidity is underscored by the fact that on May 5 and May 4, they collectively deployed Rs 8,53,282 crore and Rs 8,41,906 crore, respectively, at the reverse repo window.
The amount parked by banks under reverse repo operations on May 5 and May 4 is much higher that what they deployed (roughly about Rs 7.20 lakh crore daily, excluding Saturday and Sunday, after the last reverse repo rate cut).
“With sustained liquidity surplus and additional infusion during the week ending April 30, 2020, the RBI has undertaken term (fixed rate) reverse repo auctions in order to allow banks to park any excess funds with the RBI.
“The total reverse repo outstanding (fixed plus variable rate) as of April 30, 2020 was Rs. 7.36 lakh crore, Rs. 15,133 crore higher than Rs. 7.21 lakh crore as on April 24, 2020,” CARE Ratings said in its weekly liquidity report.
In another report, the credit rating agency observed that the COVID-19 pandemic and the subsequent extended lockdown has adversely impacted business activities of scheduled commercial banks (SCBs) due to weak demand and increased risk aversion.
“Retail loans may witness marginal contraction in credit offtake as consumer demand moderates due to disruptions caused by COVID-19. The real estate sector may also face severe stress, as individuals would delay home purchases, which may impact the housing loans as housing loans account for more than 50 per cent of retail loans,” the report said.