COVID-19 Impact: RBI Slashes Reverse Repo Rate From 4% to 3.75%
Highlights
- Reverse Repo Rate slashed
- by 25 bps to 3.75%
- Targeted Long-Term Repo Operations (TLTRO) worth Rs 50,000 crore unlocked for NBFCs and MFIs
- Special refinance facilities of Rs 50,000 crore provided to Nabard, SIDBI, and NHB
- Ways and Means Advances (WMA) limit of states increased by 60%
- 90-day NPA standard for the moratorium period eased
- Liquidity Coverage Ration demand of banks reduced to 80% from 100%
- Banks released from making dividend disburse for 2019-20
- Timeline for resolution under IBC extended by another 90 days from the existing 210 days
On 17th April 2020, Reserve Bank of India (RBI) Governor Shaktikanta Das announced a host of measures including reducing Reverse Repo Rate (RRR) and Targeted Long-Term Repo Operations (TLTRO) that are intended to ensure sufficient liquidity in the system to reduce the financial stress created by Coronavirus (COVID-19) pandemic.
Announcing plenty of measures, the RBI has slashed the Reverse Repo Rate by 25 bps from 4% to 3.75%. Though this will not have a direct impact on the interest rates consumers have to pay on loans but this will encourage banks to lend to the productive sectors of the economy.
The Reverse Repo Rate is the rate at which the central bank borrows money from the commercial banks. Just as customers deposit their excess funds with banks and earn extra income on the deposit made; similarly, banks deposit their excess funds with the RBI. The rate at which RBI gives interest to banks for depositing funds is called the Reverse Repo Rate.
Here are the key takeaways from the RBI Governor’s 2nd Press Conference since the spread of Coronavirus (COVID-19) in India:
Plans To Conduct Rs 50,000 Crore Targeted Long-term Repo Operation (TLTRO)
The central bank said it will conduct targeted long-term repo operations (TLTRO) for a total amount of Rs 50,000 crores, to start with, in tranches of proper sizes to discuss their financial requirements seeing the disruption caused by COVID-19 severely impacting the small and mid-sized companies, including NBFCs and MFIs.
Rs 50,000 Crore Refinance
Besides, the RBI will provide a special re-financing window of Rs 50,000 crore to strengthen the refinancing capacity for financial institutions like Nabard, National Housing Bank and Sidbi. the National Bank for Agriculture and Rural Development (Rs25,000 crores for refinancing regional rural banks, cooperative banks, and MFIs); the Small Industries Development Bank of India (Rs15,000 crores for on-lending/refinancing); and the National Housing Bank (Rs10,000 crores to support housing finance companies).
Reduced Reverse Repo Rate by 25 BPS
The RBI has slashed the Reverse Repo Rate by 25 bps from 4% to 3.75%. The lower rate will help banks channelize liquidity in investments and loans to productive sectors of the economy. The reverse repo rate was last cut on March 27 from 4.9% to 4%.
WMA Limit Of States Increased By 60%
The RBI announced an extension in the Ways and Means Advances (WMA) limit of the States by 60% over and above the level as on March 31, 2020, to give more support to tackle the COVID-19 barrier and relief efforts and enable them to better plan their market investments. The increased limit will be available until September 30, 2020.
NPA Classification Period Changed To 180 Days From 90 Days
In an attempt to give support to borrowers, the RBI has decided to give an asset classification standstill for standard accounts that avail a moratorium on loans between 1 March and 31 May. This means that the bad loan classification period changes to 180 days for all such accounts from 90 days.
Restriction On Dividend Distribution
The RBI has also directed that registered commercial banks and cooperative banks shall not make any further dividend payouts from profits concerning the fiscal ended March 31, 2020, until further directions.
RBI’s Repo Rate Update:
On 22nd of May 2020, RBI Governor Shaktikant Das held a press conference and reduced the Repo Rate by 40 BPS. Below measures have been taken by RBI:
40 BPS Repo Rate Cut
Repo rate decreased to 4% from 4.4% in the off-cycle meeting. Reverse repo rate stood at 3.35%
RBI’s Repo Rate Update:
On 22nd of May 2020, RBI Governor Shaktikant Das held a press conference and reduced the Repo Rate by 40 BPS. Below measures have been taken by RBI:
RBI Monetary Policy Update 2020
The Key Indicators With Their Current Rates
| INDICATOR | CURRENT RATE |
| Cash Reserve Ratio (CRR) | 3% |
| Statutory Liquidity Ratio (SLR) | 18.50% |
| Repo Rate (RR) | 4% |
| Reverse Repo Rate (RRR) | 3.35% |
| Marginal Standing Facility Rate (MSFR) | 4.65% |
| Bank Rate (BR) | 4.65% |
Accommodation stand till growth revive
MPC voted in a 5:1 ratio for a rate cut and will continue with accommodative stand till growth revive.
Domestic Development
High-frequency indicators saw a huge collapse, both in urban and rural front. Merchandise exports plunged 60.3%, imports contracted by 58.6% in April 2020. Consumer durable production declined by 33% in March 2020.
Silver Lining
Agriculture and allied activities a hope from the normal south-west monsoon this year.
Inflation
Food inflation surged in April 2020 to 8.6% with vegetables, oilseeds, and milk being the pressure points.
Outlook
- Inflation highly uncertain and headline inflation in H1FY21 will stay intact but by Q3 and Q4 it may fall below the target of 4%.
- GDP is likely to remain in negative territory in FY21. However, we will see a gradual revival of activities and demand by the 2nd half of FY21.
Regulatory and Development
- In order to give greater flexibility of SIDBI, another 90 days moratorium period for the 90 days term loan facilities will be offered.
- The facility of Rs 15,000 crore line of credit for 90 days for US dollar swap facility will be given to EXIM Bank. This will have a rollover facility for up to one year.
- The loan moratorium will be extended to 31st August 2020. Lending institutions are being permitted to restore the margins for working capital to the origin level by March 31st, 2021.
- The maximum permitted period of pre and post-shipment of credit increased from 1 year to 15 months.
- Extension of time-period for outward payments for normal imports from 6 months to 12 months.
- The group exposure limit of banks will be increased from 25% to 30%.
- The voluntary holding route for FPIs extended for 3 months.
