RBI cuts Reverse Repo Rate by 25 bps to 3.75% to Address the Liquidity Stress During COVID-19 Lockdown
“During our darkest moment, we must focus on the light,” the RBI Governor said.
The Reserve Bank of India (RBI) on Friday freed up more capital for banks to lend, announced a fresh Rs 50,000 crore targeted long-term repo operation (LTRO 2.0) to address the liquidity stress of shadow banks and microfinance institutions and hinted at the possibility of further rate cuts going forward.
Addressing media for a second time within a month, RBI Governor Shaktikanta Das unveiled fresh measures aimed at maintaining adequate liquidity in the system, facilitating and incentivising banks to ensure better credit flow and enabling normal functioning of the financial markets.
RBI slashed the reverse repo rate by 25 bps to 3.75 per cent, making it less attractive for commercial banks to park cash with the central bank.
The central bank didn’t tinker with the repo rate, but the governor said the inflation trajectory is likely to fall below its target within a month or two, which will create more policy space for it to better address the challenges posed by the Covid-19 outbreak and the lockdown to check its spread. “The space needs to be used effectively and in time,” he said.
Earlier on March 27, RBI had slashed the repo rate by 75 basis points to 4.40 per cent from 5.15 per cent to help the economy fight the Covid-19 pandemic. Simultaneously, the reverse repo rate was cut by 90 basis points to 4 per cent from 4.90 per cent to ensure that banks don’t passively park funds with RBI and start lending to the productive sectors of the economy.
The central bank announced a special Rs 50,000 crore targeted long-term repo operation, called TLTRO 2.0, to address the liquidity needs of the NBFCs and microfinance institutions. Banks availing these funds will be required to deploy the same within one month and 50 per cent of the money has been earmarked for midsized NBFCs and MFIs.
Governor Shaktikanta Das said the benefits of the earlier TLTRO scheme went largely to PSUs or large corporations. He promised to step up the TLTRO 2.0 should the need arise for making more capital available to the shadow banking and microfinance sectors.
Das said the 90-day non-performing assets norm would not apply on moratorium granted on existing loans by banks..
RBI also eased the liquidity coverage ratio (LCR) requirement of scheduled commercial banks from 100 per cent to 80 per cent with immediate effect. LCR refers to the proportion of highly liquid assets held by a bank to ensure their ongoing ability to meet short-term obligations. Its relaxation will free up more capital for the banks to deploy in the market.
Das said the announcement will be rolled back in two phases in October 2020 (to 90 per cent) and April 2021 (100 per cent).
The apex bank asked banks not to make any further dividend payout in view of financial difficulties arising from coronavirus.
The RBI Governor also announced a Rs 50,000 crore special finance facility to all-India financial institutions such as Nabard, Sidbi, NHB as they are not being able to raise fresh resources from the market due to the tightening of the market.
He said RBI has been very proactive in the wake of the ongoing virus outbreak and the central bank is monitoring the evolving situation closely, adding that India would do ‘whatever it takes’ to stop the coronavirus from spreading.
“During our darkest moment, we must focus on the light,” he said.
Das said banks and financial institutions have risen to occasion to ensure normal functioning during the outbreak of the pandemic.
He said the macroeconomic landscape has deteriorated severely in some areas, but added that India still is among handful of countries, projecting positive growth.
Taking about the impact of the ongoing lockdown, Das said power demand in the country has fallen 35-30 per cent. Also, the fall in India’s exports in March was much more severe than global financial crisis.
Das hoped that robust tractor sales will offset farm labour shortage and a normal monsoon will bode well for rural demand.
There has been no downtime of internet or mobile banking during lockdown and banking operations have been normal, he said. Surplus liquidity in the banking system has increased substantially as result of central bank actions, Das said.