RBI Cuts Repo Rate by 75bps, EMIs on Hold for 3-month:COVID-19 Impact

RBI Cuts Repo Rate by 75bps, EMIs on Hold for 3-month:COVID-19 Impact

Highlights:

  • RBI slashes Repo Rate by 75 basis points
  • Key Repo Rate stands at 4.4% and Reverse Repo Rate at 4%
  • RBI allows 3-month moratorium on EMIs and loans
  • All outstanding loans such as- corporate loans, home loans and car loans along with personal loans qualifies for EMI hold
  • RBI also announced a slew of liquidity measures related to TLTRO, CRR and MCLR to ease mounting pressure
  • The decision was taken to support the economy in the wake of the novel coronavirus pandemic

RBI governor Shaktikanta Das has announced a massive rate cut in the repo rate and reserve repo rate to help arrest the economic slowdown in the wake of the coronavirus (Covid-19) outbreak. The Central Bank has lowered the key repo rate by 75 basis points (bps) to 4.4% and the reverse repo rate cut at 4%,down 90 bsp. The decision was taken in the Monetary Policy Committee (MPC) meeting, where the governor has also announced a 3-month moratorium on loan EMIs. This hold of EMIs on all outstanding loans will be a major relief to all concerned stakeholders, including home loan borrowers and developers. This monetary policy review of the RBI was rescheduled in wake of a pandemic which originally scheduled to take place on March 31, 2020 and April 3, 2020.

The Big Bang Rate Cute Move

The RBI’s MPC has voted in favour of an interest rate cut to the tune of 75 basis points, which brings the repo rate down to 4.4% from 5.15%, the lowest in at least 15 Years. 

Talking about a reverse repo rate, it has also been reduced by 90 basis points to 4% in a bid to maintain financial stability and revive growth.

“It is our effort to ensure normal functioning of the market,” the governor said. A big recession coming for all the world, and said India won’t be immune. It all depends how India responds to the situation, he said

Global slowdown could make things difficult for India too, despite some help from falling crude prices, he said. Food prices may soften further on record crop, he added. Aggregate demand may weaken and ease core inflation further, he added.

“MPC noted that global economic activity has come to a near standstill as Covid-19 related lockdowns and social distancing in affected countries. Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed,” Shaktikanta Das said.

Repo rate is the rate at which RBI lends money to commercial banks, and the reverse repo rate is the rate at which it borrows from them.

EMI, Loans on Hold

It also announced that banks are permitted to allow a three-month moratorium for on payment of EMIs on all term loans that were outstanding on March 1.

“All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020,” the statement added.

This hold on EMIs applies to all outstanding loans such as- corporate loans, home loans and car loans along with personal loans. This is one of the key takeaways from RBI’s announcements as many people have been financially affected due to the lockdown implemented to prevent novel coronavirus from spreading in India. But it remains to be seen as to what extent this helps customers.

Other Liquidity Measures

Apart from reducing key rates, the RBI also announced a slew of liquidity measures related to TLTRO, CRR and MCLR to ease mounting pressure. RBI will also include measures like-deferring interest payments on working capital; easing of working capital financing; deferment of implementation of the net stable funding ratio; and the last tranche of the capital conservation buffer.

“It has been decided to reduce the Cash Reserve Ratio (CRR) of all banks by 100 basis points to 3% of Net Demand and Time Liabilities with effect from the fortnight beginning March 28 for a period of 1 year,” the RBI governor announced.

The announcement came just a day after the government unveiled a Rs 1.70 lakh crore relief package to shield poor people from the virus outbreak. The RBI’s relief measures announced in view of the Covid-19 pandemic stands at 3.2% of the GDP.

Meanwhile, RBI is also in the process to conduct many other monetary operations for better liquidity management in a bid to support the economy in the wake of the novel coronavirus pandemic.

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