RBI Cuts Repo Rrate by 75 Bps to 4.40%

As the world comes to a halt with the outbreak of the global Coronavirus pandemic, International credit rating institutions and research analysts such as Moody’s and Fitch have constantly cut the projected growth of India for  2020. Moody’s lowered India’s GDP growth outlook to a staggering 2.5% from 5.3% and Fitch has reduced the rate to 4.6% from 5.4%.The ongoing Saudi-Arabia, Russia and US oil price war and the global economic slowdown have only added to India’s woes.

In response, the  Reserve Bank of India (RBI) has assured the nation that it is on track to help mitigate the economic impacts of the coronavirus outbreak. In what is being hailed as a major move, RBI Governor Shaktikanta Das announced a huge 75 basis points cut in the repo rate which reduced it to 4.40% from 5.15% respectively. India is not alone in taking this path, and is preceded by Banks such as the U.S Federal Reserve and the Reserve Bank of New Zealand, who have also slashed interest rates to record lows in the hopes of providing stimulus to their floundering economies.

The repo rate refers to the rate of interest at which the central bank allows other banks to borrow money from it. When the RBI cuts repo-rate, it is usually done to improve the lending and investment capacity of Banks. This time, as RBI cuts repo rate by 75 bps to 4.40%, banks will be able to take out  loans from the RBI at lower rates, incentivising them  to consequently reduce interest rates on personal and business loans.

A reduction in the payable interest of Business loans will allow for capital injection into struggling businesses and new start-ups, alleviating working capital crunches and improving liquidity. On the consumer side, a reduction in personal loan interest rates is hoped to incentivize individuals to take loans for meeting personal expenses or for financing new small-scale businesses and investments. The general idea is to ensure that the economy is not starved of cash, and to tackle the possibility of recession with force.

The move will also bring relief to a floundering banking sector,  hit hard by the Yes Bank Crisis and the PMC bank crisis. NIFTY Bank and BANKEX on the National stock exchange (NSE) and the Bombay stock exchange (BSE) respectively have incurred huge losses in the past year. This move is especially helpful for the banking sector in India as policies of injecting liquidity into the market are being carried out through the commercial banks. This, in a way, is also a sign to worried depositors that their money is safe in the hands of banks

The Monetary Policy committee (MPC) announced this measure on Friday along with a number of other measures to act as an impetus for economic revival. Some of the measures taken are:

1. All Banking and Non- Banking Financial Institutions can provide a 3 month moratorium on EMI Payments. This has been done to help avoid major NPAs and allow for risk-weight reduction.
2. Those who defer loans payments will not be termed as defaulters and will not compromise their credit history in any way.
3. Reverse repo-rate has been reduced by 90 basis points to 4%. This is the rate at which the RBI borrows from commercial banks, usually in order to control inflation and suck excess money out of the economy. The slash in interest helps incentivized  Banks to keep money with themselves.
4. Cash Reserve ratio (CRR) has been reduced by 100 basis points to 3%. CRR is the portion of total deposits that must be held in reserve by the bank in order to give to depositors as and when needed. Reducing this rate improves the bank’s liquidity and allows it to pump more money into loans and investments.
5. An economic stimulus package of 3.74 lakh crore has been planned to rescue the economy.

The reforms bought out by the Monetary Policy Committee are substantial and at par with reforms being introduced internationally. However, the banking sector is a complex structure and a significant lag can be expected before the cut in Repo and Reverse-Repo rates affects the consumer loan rates. Still, with a comprehensive policy in place to tackle the economic slowdown, the RBI has made a major step towards containing the economic impacts of the virus, mirroring the efforts made to contain the outbreak itself.