The three liquidity measures — namely targeted long-term repo operations (TLTRO), cash reserve ratio (CRR) cut of 100 basis points and the increase in marginal standing facility (MSF) to 3 per cent of the statutory liquidity ratio (SLR) — announced by the Reserve Bank of India (RBI) will pump Rs 3,74,000 crore to stabilise the financial system hit by the COVID-19 pandemic. This huge liquidity injection into the financial system should help financial institutions and flow of funds to the real economy, bankers said.
“The large rate cut, adjustment in capital conservation buffer, moratorium on repayments and the bazooka of conventional CRR cut and unconventional liquidity measure of incentivising banks to support the commercial paper market, all will help financial markets stabilise, lead to immediate rate transmission and address the credit needs of the real economy,” said State Bank of India Chairman Rajnish Kumar.
Focus on liquidity to aid real economy
Bankers are hopeful that the huge amount of liquidity injection into the financial system would help financial institutions and boost flow of funds to the real economy. The stock markets and the rupee have been showing volatile movements in the last three weeks amid the sell-off in global markets. Foreign investors have pulled out over Rs 1 lakh crore from equity and debt markets in March so far.
The TLTRO of up to three-years tenor of appropriate sizes for a total amount of up to Rs 1,00,000 crore will be at a floating rate linked to the policy repo rate. “Liquidity availed under the 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 27,” RBI said. Banks will be needed to acquire up to 50 per cent of their incremental holdings of eligible instruments from primary market issuances and the other 50 per cent from secondary market, including from mutual funds and NBFCs.
The reduction in the CRR would release primary liquidity of about Rs 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents, rather than in relation to holdings of excess statutory liquidity ratio (SLR). This dispensation will be available for a period of one year ending March 26, 2021.
Taking cognisance of hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements, the RBI decided to reduce the requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per cent effective from the first day of the reporting fortnight beginning March 28. Under the MSF, banks can borrow overnight at their discretion by dipping up to 2 per cent into the SLR. In view of the exceptionally high volatility in domestic financial markets which bring in phases of liquidity stress and to provide comfort to the banking system, it has been decided to raise the limit of 2 per cent to 3 per cent with immediate effect.
This measure will be applicable up to June 30, 2020, the central bank said. This is intended to provide comfort to the system by allowing it to avail an additional Rs 1,37,000 crore of liquidity under the liquidity adjustment facility (LAF) window in times of stress at the reduced MSF rate announced in the Monetary Policy Committee’s resolution.
The RBI also decided to widen the existing policy rate corridor from 50 bps to 65 bps in view of persistent excess liquidity. Under the new corridor, the reverse repo rate under the LAF would be 40 bps lower than the policy repo rate. The MSF rate would continue to be 25 bps above the policy repo rate, the Reserve Bank said.
SBI passes 75 bps cut by RBI on to interest rates on loans, deposits
Mumbai: Hours after the RBI slashed repo rate and cash reserve ratio, State Bank of India Friday cut the interest rates on loans and deposits. The bank passed on the entire 75 bps repo rate cut to its borrowers availing loans linked to external benchmark linked lending rate (EBR) as well as repo linked lending rate (RLLR).
From April 1, EBR will be down to 7.05 per cent per annum from 7.80 per cent. SBI has cut RLLR to 6.65 per cent per from 7.40 per cent. Consequently, EMIs on eligible home loan accounts (linked to EBR or RLLR) will get cheaper by around Rs 52 per one lakh on a 30-year loan, SBI said.
In view of adequate liquidity in the system and the additional liquidity measures announced in the monetary policy, the bank has realigned its interest rate structure on deposits from March 28. Retail term deposit interest rates have fallen by 20 bps to 50 bps across tenors. SBI also reduced bulk term deposit rates by 50 bps to 100 bps across tenors.
According to the state-owned lender, a decision on MCLR will be taken when the asset liability committee (ALCO) meets in April.
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