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Coronavirus impact: RBI cuts repo rate by 75 bps to 4.4%, reverse repo cut by 90 bps to 4%

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) which met on March 24, 26 and 27 had a majority of 4-2 towards the favour of a 75 bps repo rate cut.

By: Express Web Desk | New Delhi | Updated: March 27, 2020 5:25:25 pm
RBI governor Shaktikanta Das at a press conference. (Express photo by Nirmal Harindran, File)

In a bid to tackle the impact of novel coronavirus (Covid-19) on the Indian economy, the Reserve Bank of India (RBI) cut its repo rate by 75 basis points (bps) to 4.4 per cent Friday.

The central bank’s Monetary Policy Committee (MPC) which met on March 24, 26 and 27 had a majority of 4-2 in favour of a 75 bps repo rate cut. This apart, the reverse repo rate also was reduced by 90 bps to 4 per cent.

The central bank also cut the cash reserve ratio (CRR) for the banks by 100 bps to 3 per cent with effect from March 28 for the next year, which it said will release Rs 1.37 lakh crore in liquidity.

READ | Here’s what the RBI announced today

Speaking to the media, RBI governor Shaktikanta Das said that the rate cut was warranted due to the severe impact of coronavirus on the Indian economy.

“Worthwhile to remember that tough times never last, only tough people and institutions do,” Das said in his speech. He went on to say that the RBI has taken a number of steps in the last month and added that the central bank was at work and in mission mode.

Speaking about the Indian economy, the RBI governor said that the GDP growth rate for the fourth quarter (Q4) of the financial year 2019-20 and 2020-21 are likely to be affected due to the impact of Covid-19.

“The second advance estimates of the National Statistics Office released in February 2020 implied real GDP growth of 4.7 per cent for Q4:2019-20 within the annual estimate of 5 per cent for the year as a whole. This is now at risk from the pandemic’s impact on the economy.” the RBI MPC statement said.

Explained | Rate cut and loan-repayment moratorium: How RBI is trying to reduce pandemic stress

Das announced four measures to help the Indian economy – measures to expand the liquidity in the market, steps to reinforce monetary transmission, ease financial stress by relaxing repaying pressures, improve the functioning of markets in view of high volatility.

Under the liquidity measures, the central bank governor said that under the targeted long term repo operations, RBI will conduct auctions of upto three-year tenure for upto Rs 1 lakh crore. He also announced that the CRR has been reduced by 100 bps to 3 per cent with effect from March 28 for one year. He said that this will release Rs 1.37 lakh crore liquidity in the system. The central bank reduced the minimum daily CRR balance required from 90 per cent to 80 per cent from March 28 till June 30, 2020.

The RBI also increased accommodation under the marginal standing facility from 2 per cent of SLR to 3 per cent. Das said that all this will inject Rs 3.74 lakh crore into the monetary system. He added that the total liquidity injection is 3.4 per cent of the gross domestic product (GDP).

Speaking about the regulation and supervision by RBI, Das said regarding the moratorium of loans, all the commercial banks were permitted to allow a three-month moratorium on payment of instalments of all term loans as on March 1, 2020.

About the deferment of interest of working capital facilities, he said that the banks are permitted to allow deferment of payment of interest outstanding by three months as of March 1, 2020. These would not result in the downgrading of asset classification or NPA. All these measures will not affect the credit history of the borrowers.

Towards the end of his speech, Das said that the Indian banking system is safe and all the deposits of the public are safe in private banks. He appealed to people not to resort to panic withdrawals.

The RBI governor said that all instruments – conventional and unconventional – are on the table to support financial stability and revive growth.

How market, economy, banking experts reacted

Commenting about the RBI policy, BankBazaar.com CEO Adhil Shetty said, “The three-month loan moratorium will come as a big relief for borrowers who might have been struggling with their repayments in these times of extraordinary economic challenges and uncertain financial future. If you can afford to repay your loan EMIs, you should try to set aside that amount even if you’re not required to pay them during the moratorium unless doing so will adversely impact other pressing financial requirements. This would ensure speedy lowering of loan burden once the moratorium ends. Most importantly, get complete clarity with your lender how it will impact your loan before reaching a conclusion and don’t assume anything based on hearsay. Non-payment of loan EMIs during the moratorium will not impact your credit score, as mentioned by the RBI governor. As such, you should stay on top of it by checking your credit score regularly during the moratorium period. Also, the moratorium doesn’t apply to credit card dues. So, clear your card dues in full on time to avoid any impact on your credit score.”

Deepthi Mary Mathew, Economist at Geojit Financial Services said, “It could be said that RBI has announced massive liquidity boosting measures including cuts in repo rate, reverse repo rate and CRR. The governor has also hinted about using unconventional methods if needed. In the present scenario, considering the weak sentiments in the economy, the effectiveness of monetary stimulus will be limited. Three-month moratorium on loans is a welcome step.”

Dhiraj Relli, MD & CEO at HDFC Securities said, “Relief to the borrowers by way of a moratorium on term loans for 3 months, deferment of interest payment on working capital loans is a big positive. Overall MPC gave more than what was expected and assured to resort to more measures if the situation worsens. The impact of these measures on economic growth could take some time to fructify. Financials will get breathing space as far as recovery and NPA recognition is concerned. It could elevate sentiments temporarily but the main impact will be visible post the lifting of lockdown. In the interim softer yields could benefit investors in Gsec/other debt papers (including Banks) to book some MTM gains.”

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, “The combination of measures to boost liquidity, improve monetary transmission and relax repayment pressures will act with force multiplier in the economy. RBI has done a great job. As the Governor said, “Tough times don’t last, but tough institutions do.” RBI has shown that it is tough.”

Lincoln Bennet Rodrigues, Founder and Chairman of Bennet & Bernard Group said, “The 3-month moratorium on payments of term loan instalments (EMI) & interest on working capital will give much-desired relief for individuals and now it needs quick transmission for maximum impact. This will reduce the borrowing cost for the home-seeker significantly and have a positive impact on real estate. Banks should do all they can to keep credit flowing now. All these progressive and timely measures will push up the demand curve in the economy and keep the consumption cycle on. The assurance by RBI governor that further steps will be taken down the road, if problems persist is also noteworthy. Overall, the measures will give a boost to the macroeconomy and ensure financial stability.”

Sanjay Dutt, MD & CEO, Tata Realty and Infrastructure said, “the announcement of Rs 1.7 lakh crore relief package to help those hit the hardest by the Covid-19 lockdown is commendable. We also applaud RBI’s bold move of relaxing the repo rate by 75 basis points to 4.4 per cent, as this will lead to a reduction in home loan rates/ equated monthly instalments (EMIs) of borrowers, thereby taking some financial burden off them. These efforts are also bound to make the residential real estate sector more attractive for new home buyers as it will be cheaper to take new loans. We are glad to see that the government and RBI are working together to combat the slowing GDP growth and inflation and help the real estate sector as it forms the backbone of several other sectors. These new announcements will also help lift the homebuyer sentiment, kick-starting the demand cycle for mid-range homes as well as affordable housing.”

Rajiv Agarwal MD and CEO Essar Ports said, “RBI’s move to reduce interest rates and infuse liquidity is a welcome move. The moratorium of 3 months for interest and principle payments along with a sharp cut in the CRR will ease the liquidity and help industry as well as other segments of the economy. More steps might be needed once the government comes out with the much-needed stimulus package to overcome the economic crisis arising from COVID-19.”

Jaspal Bindra, Executive Chairman, Centrum Group said, “The RBI has provided a much-needed stimulus for borrowers and financial institutions, clearly signalling their intent to maintain stability in the economy. The 3-month moratorium on the term and working capital loans, subject to further clarification from the RBI, will permit many borrowers to keep their accounts healthy during the lockdown period and immediately beyond. The bold move has been the CRR reduction providing 1,37,000 crores liquidity to the banks. CRR earned nothing and now will begin to earn a commercial return for the banks as well as allow them to manage the delay in cash flows from the moratorium. The big question that remains unanswered is what it will take for banks enjoying substantial liquidity to extend credit to the needy sectors.”

Anirban Chakraborty, Managing Director & CEO of Tourism Finance Corporation of India (TFCI) said, “We welcome RBI’s stance to support the economy amidst these trying and uncertain times of the deadly Covid 19 pandemic. The announcement brings much needed immediate relief to the borrowers across sectors. We further expect additional special relief packages to be provided to the sectors worst affected such as aviation, tourism to name a few. With the government’s decision of a 21-day lockdown combined with timely measures undertaken by the Finance Ministry, we expect to tide over the current situation.”

Vishal Kampani, Managing Director of JM Financial Group said, “The RBI intervention to inject liquidity into the strained financial system can be viewed as the first step in the right direction. Only the financial sector can tick the economic momentum moving during these hard times. The measures will go a long way in stabilizing the markets, providing relief to companies and individuals on debt servicing, and not the least, ensuring liquidity for the markets. The banks should transfer the benefit of the repo rate cut to the beneficiaries including the corporates so that the impacts be visible across the board. The three-month moratorium, a big relief also for those having home loans, will further ease the liquidity crunch. However, there need to be more concrete measures for each sector including the NBFCs.The cautious outlook given by the RBI itself warrants for bigger steps”

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