RBI's Bazooka: Interest rates cut, EMIs frozen, liquidity boosted

As a large section of society is grappling with the crippling impact of the nationwide lockdown, the RBI allowed banks to put on hold EMI payments on all term loans for three months, slashed the cost of fresh borrowing by cutting policy interest rate by steepest in more than 11 years and infused a massive Rs.3.74 lakh crore liquidity as it joined the efforts of the government to counter the economic fallout of the coronavirus pandemic.

Recognising the urgency of initiating a monetary policy response to the Covid-19’s economic shock to the economy, the Reserve Bank of India brought forward by a week the key meeting of the monetary policy committee and said it will retain its accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus on the economy.

The benchmark repurchase or repo rate was slashed by 75 basis points, bringing it down to 4.4 per cent, lower than the 4.75 per cent in April 2009 which the RBI had implemented in response to the 2008 global economic and financial crisis.

Alongside, it cut the Cash Reserve Ratio - the amount of deposits banks must set aside as reserves - by 100 basis points to 3 per cent, releasing Rs.1.37 lakh crore across the banking system.

The biggest rate cut since January 2009 takes interest rate to the lowest in more than one-and-a-half decade (lowest since October 2004). The reverse repo rate was reduced 90 basis points to 4 per cent, creating an asymmetrical corridor, RBI Governor Shaktikanta Das said.

The RBI supplemented this by permitting all banks to give a three-month moratorium on EMIs on all outstanding loans, providing relief to home and auto buyers as well as real estate sector where construction activities are already at a standstill.

This moratorium was also on interest on working capital.

The reduction in CRR as also other measures such as five long-term repo operations, would lead to additional liquidity of Rs.3.74 lakh crore, amounting to nearly 2 per cent of FY20 GDP, Das said, adding that along with measures taken by the RBI in recent days, the liquidity infused worth 3.2 per cent of the gross domestic product. The central bank, which had cut interest rates by 135 bps in five installments in 2019 last year before hitting pause since December citing high inflation, however, did not give an outlook on India’s economic growth as well as inflation saying it “would be contingent on intensity, spread, and duration of COVID-19”.

The RBI measures come a day after the government unveiled a Rs.1.7 lakh crore package of free foodgrains and cash doles to the poor.

However, even before the pandemic the Indian economy was struggling with problems like lack of demand for credit from both consumers and investors and it won’t be taken care by these measures, he added.

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