RBI cuts policy rate sharply to decade’s lowest 4.4pc

100 bps CRR reduction to release Rs1.37 lakh cr

Market hails 3-month moratorium on loan repayments

MUMBAI: Close on the heels of the Rs1.7 lakh crore relief package announced by the finance Minister Nirmala Sitharaman on Thursday, the Reserve Bank of India (RBI) on March 27 cut the policy repo rate by 75 basis points (0.75 percentage point) to the decade’s lowest of 4.4 per cent, along with a one percentage point cut in the cash reserve ratio (CRR) of banks to 3 per cent, thus threw open the liquidity floodgates as part of a massive exercise to contain the traumas of a the corona virus onslaught.

Payment of instalments towards all term loans in the country will enjoy a three month moratorium while the newly originated loans are expected to attract a reduced interest regime in line with the Friday’s cut in repo following the monetary policy meeting (MPC) that was otherwise scheduled for the first week of April.

“The 3-month moratorium on payments of term loan instalments (EMI) & interest on working capital will give the much-desired relief. Slashed interest rate needs quick transmission,” said Nirmala Sitharaman, the Union Finance Minister, responding to the RBI move.

CRR or cash reserve ratio is the amount of cash the commercial banks have to mandatorily park with the Reserve Bank of India (RBI) in proportion to their deposits. “This cut in CRR would release liquidity worth Rs1.37 lakh crore among banks,” the RBI Governor said.

Over the past few days, the central bank had carried out several liquidity management measures, infusing close to Rs3.80 lakh crore into the system.

The reverse repo rate has been cut by 90 basis points. Before Friday’s cut, the repo had hit the lowest point of 4.74 per cent in April 2009 in the wake of the Global Financial Crisis.

Monetary authorities use repo and reverse repo to control money supply in the economy, thereby inflation. The unlocking of fresh funds through CRR cut allows the commercial banks to lend more and at the same equip the banks to earn interest on this fund, which otherwise remains parked with RBI un-remunerative.

“We need to be always battle ready,” Governor Shaktikanta Das said in a statement, adding that “tough times never last.” The Governor added that RBI was at work and is on a mission mode and will ensure the normal functioning of the markets.
Reacting to the RBI announcement, the Finance Minister said the rate cut will encourage growth and ensure financial stability.

“Time has come for RBI to unleash an array of instruments to expand liquidity in the system sizeably and to improve monetary transmission,” the FM further said.
Stating that liquidity distribution remains asymmetrical in the economy, Das added that the Indian banking system remained safe and sound. “It would be fallacious to link share price movements to the safety of deposits,” he said.

Maintaining liquidity in the system has seemed to be a top priority for RBI in the past few months. The central bank has infused about Rs3.80 lakh crore into the system through various repo measures undertaken on a regular basis in the recent past. The RBI governor said the central bank’s overall liquidity injection now stands at 3.2 per cent of GDP.

Das assured that the central bank will continue to be vigilant and take “whatever steps necessary” to mitigate the impact of the coronavirus on the economy/

He further asserted that the central bank was maintaining its “accommodative” stance, and would maintain its position “as long as necessary” to revive growth, while ensuring inflation remained within target.

 

 

 

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