The Reserve Bank of India (RBI) on Friday unveiled a monetary bazooka, slashing the repo rate and reverse repo rate by 75 basis points (bps) and 90 bps respectively, slicing the cash reserve ratio (CRR) by 100 bps, and temporarily easing the repayment pressure on borrowers in a bid to mitigate the impact of Covid-19.
These measures came a day after Finance Minister Nirmala Sitharaman announced a ₹1.70-lakh crore relief package under the Pradhan Mantri Garib Kalyan Yojana for the poor to help them fight the battle against the coronavirus pandemic.
The repo rate, the interest rate at which the central bank provides funds to banks to overcome short-term liquidity mismatches, is now at 4.40 per cent against 5.15 per cent earlier. One basis point equals one-hundredth of a percentage point.
The last time the repo rate went below 5 per cent mark was in 2009, when it was at 4.75 per cent between April 21, 2009 till March 19, 2010.
The rate-setting monetary policy committee (MPC) voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth and mitigate the impact of Covid-19, while ensuring that inflation remains within the target, RBI Governor Shaktikanta Das said.
While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate, he added.
Simultaneously, the fixed rate reverse repo rate (the interest rate at which banks park their surplus liquidity with RBI) was reduced by 90 basis points to 4 per cent, thus creating an asymmetrical corridor.
The Governor explained that reverse repo rate has been cut more steeply to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank, and instead, to use these funds for on-lending to productive sectors of the economy.
War effort to combat Covid-19
In view of the Covid-19 pandemic, the MPC advanced its meeting, originally scheduled for March 31, April 1 and 3, 2020, to March 24, 26 and 17. This decision and its advancement have been warranted by the destructive force of the coronavirus.
Das observed that the MPC’s decisions are intended to mitigate the negative effects of the virus, revive growth, and above all, to preserve financial stability.
“We are living through an extraordinary and unprecedented situation. Everything hinges on the depth of the Covid-19 outbreak, its spread and 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 the Governor.
Liquidity enhancement measures
To help banks tide over the disruption caused by Covid-19, the RBI decided to reduce the CRR, which is the slice of deposits that banks have to park with RBI, of all banks by 100 bps to 3 per cent of deposits (from 4 per cent) with effect from the reporting fortnight beginning March 28, 2020 for a period of one year. This reduction in the CRR would release primary liquidity of about ₹1.37-lakh crore.
The RBI said it will conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount of up to ₹1-lakh crore at a floating rate linked to the policy repo rate.
Liquidity availed under this scheme by banks has to be deployed in investment-grade corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020.
Eligible instruments comprise both primary market issuances and secondary market purchases, including from mutual funds and non-banking finance companies. Investments made by banks under this facility will be classified as held to maturity (HTM). Exposures under this facility will also not be reckoned under the large exposure framework.
Easing repayment pressures
The Governor announced steps to mitigate the burden of debt servicing brought about by disruptions on account of Covid-19 pandemic and improving access to working capital.
Specifically, all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions, and non-banking finance companies (including housing finance companies and micro-finance institutions) have been permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020.
This step will ease the pressure on repayments, not only for corporates and micro, small and medium enterprises, but also retail borrowers.
In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. The accumulated interest for the period has to be paid after the expiry of the deferment period.
The moratorium on term loans and the deferring of interest payments on working capital will not result in asset classification downgrade.
What this means is that borrowers need not worry about missed loan repayments being reported by banks to credit information companies. So, their credit scores will not be affected. Banks too, need not worry about provisioning as asset classification will remain unchanged.
In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been allowed to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes will not result in asset classification downgrade.