The Reserve Bank Of India (RBI) Governor Shaktikanta Das announced a bouquet of monetary measures, including a set of rate cuts to the repo rate, reverse repo rate and to the cash reserve ratio, also giving lending institutions the freedom to grant a 3-month moratorium on the repayment of all term loans. These monetary measures came a day after fiscal relief measures worth ₹1.7 trillion (₹1,70,000 crores) was announced by Finance Minister Nirmala Sitharaman even as the country grapples with a shutdown to combat the spread of COVID-19.
"It is time to unleash all the policy measures at our disposal", said Das, as he announced these measures. They are aimed at putting as much liquidity into the banking system as possible and to ensure growth, financial stability of the economy and of the rupee
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Overall, the RBI has injected liquidity worth ₹2.8 lakh crores since February 2020, equaling around 1.4% of India's gross domestic product (GDP). These newly introduced measures hold significance as the RBI states that these measures will further take the overall liquidity injection to 3.2%.
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1. A repo and reverse repo rate cut: The RBI has cut the reverse repo rate - also called the reverse repurchase rate - by 90 basis point (or 0.9 percentage points) to 4.0%. This is the rate at which banks keep their funds with the RBI on a short term basis. The repo rate - or the repurchase rate - has also been cut by 75 basis points to 4.4%. These cuts are to disincentivise banks to keep funds parked with the RBI.
2. A cut in the cash reserve ratio: The RBI also announced a cut to the cash reserve ratio by 100 basis points (or 1 percentage point) to 3%. This is the ratio of cash that banks need to maintain with the RBI to their total deposits. This relief is expected to give the banking system an additional 1,37,000 crores to boost lending.
3. A moratorium on loan repayments: The RBI has further permitted all lending institutions, consisting of banks and non-banking financial companies (NBFCs), to grant a moratorium of three-months on loan repayments. This moratorium would be on outstanding loans as of March 1 this year.
The RBI has clarified that this moratorium will be on installments due between March 1 and May 31, and will include both principal and interest components of the installment. This moratorium will accommodate bullet repayments, equated monthly installments are credit card dues. However, interest would continue to accrue on the outstanding portions of loans during this period.
4. Market stability measures: To counter large selloffs in equity, foreign exchange and bond markets, the RBI has started a long term repo operation (LTRO) facility worth ₹1,00,000 crores to banks. This liquidity needs to be deployed by banks into investment grade bonds, commercial papers and non-convertible debentures, which can be done through markets, mutual funds or NBFCs.
5. Easing working capital flows: To those availing of working capital through demands drafts and cash credits, the RBI has permitted banks to rework margins and working capital cycles, and to grant interest payment deferrals. The central banks also clarified that the reworked margins and moratorium on loan repayments will not affect creditworthiness, and will not impact credit history.
A transcript of the Governor's address can be found here, and a full disclosure by the RBI on these policies can be found here.
Prime Minister Narendra Modi announced a three-week nationwide lockdown starting March 25 in a televised address on March 24.
Also Read: "Forget Going Out For 21 Days", Says Modi, Announcing A Nationwide Shutdown
Editors note: This story earlier cited a report by CNBC-TV 18 which said that credit card debt would not be included in the 3-month repayment moratorium. However, RBI guidelines shared above mentions the inclusion of credit cards. This story has been updated reflecting the same. The error is regretted.