RBI Cuts Rates, Allows 3-Month Pause On EMIs To Offset Coronavirus Impact

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The Reserve Bank of India has slashed the key lending rate by 75 basis points (0.75 percentage point) in an emergency move on March 27 to counter the economic fallout from the fast-spreading coronavirus pandemic. The move came after an unscheduled meeting of the Shaktikanta Das-headed Monetary Policy Committee, which was originally slated for a bi-monthly review early next month. Four out of the six members of the Monetary Policy Committee voted in favour of the move. “The economic outlook globally is uncertain and obviously negative… Financial stability is the topmost priority of the RBI in this crisis,” said Shaktikanta Das, as India entered the third day of a 21-day countrywide lockdown to curb the rapid spread of the coronavirus outbreak.

Things to know about RBI’s move:

  • The magnitude of the cut in repo rate – the key interest rate at which the RBI lends short-term funds to commercial banks – has been the highest under Shaktikanta Das, and also the steepest since January 2009. Until now, the largest cut by Mr Das was of 35 basis points in August last year and considering the latest reduction, he has slashed the rates by a total of 210 basis points.
  • The RBI Governor also announced a cut of 100 basis points in the cash reserve ratio for a period of one year, a step he said will ensure sufficient liquidity in the system. CRR or cash reserve ratio is the amount of cash commercial banks have to mandatorily park with the Reserve Bank of India. “This would release liquidity worth Rs 137 billion within banks,” the RBI Governor said.
  • The central bank also permitted all commercial banks and lending institutions to allow a three-month moratorium on all loans, in view of the ongoing lockdown to protect the 1.3 billion people in the country from the deadly virus. “Banks should do all they can to keep credit flowing,” Mr Das added.
  • The priority is to undertake “strong and purposeful action” to protect the economy, and there is a need for all stakeholders to fight against the coronavirus pandemic, the RBI governor said via video conference.
  • The surprise moves came as India entered the third day of a 21-day countrywide lockdown to curb the rapid spread of the coronavirus pandemic. The Monetary Policy Committee was originally scheduled to meet early next month.

“Indian banking system is safe and sound… In spite of the challenging environment, I remain optimistic,” the RBI Governor said.

The RBI has already infused Rs 2.7 trillion into the country’s financial system since the February policy meeting, Mr Das said, adding that the central bank’s overall liquidity injection stands at 3.2 per cent of GDP.

The central bank will continue to be vigilant and take “whatever steps necessary” to mitigate the impact of the coronavirus on the economy, Mr Das assured. He further asserted that the central bank would maintain its “accommodative” stance of policy “as long as necessary” to revive growth, while ensuring inflation remained within target.

On March 26 Finance Minister Nirmala Sitharaman had announced a Rs 1.7 trillion fiscal package to support the poor through direct cash transfers and food security measures, without giving details on how the programme will be funded.

India is staring at the worst annual rate of gross domestic product (GDP) expansion recorded since the 2008-09 global financial crisis, and many economists have anticipated a further blow to the economy thanks to the COVID-19 outbreak.

By

Babita Sharma

Editor