RBI trims reverse repo rate; unveils slew of liquidity measures to cushion impact of Covid-19

The Reserve Bank of India on Friday cut the reverse repo rate and announced a slew of measures including re-finance window of Rs 50,000 crore and targetted long term repo auction of similar amount to deal with the impact of the Covid-19 pandemic.

The central bank's Governor Shaktikanta Das assured that RBI will use all instruments at its disposal to deal with the challenges posed by the outbreak of the novel coronavirus, depending on evolving situations.

This is not the last of the announcements. Based on evolving situations, the central bank will come up with responses in the future in the interest of the economy, he said.

In a video message, Das said in order to encourage banks to deploy the surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4 per cent to 3.75 per cent with immediate effect.

The reverse repo rate is the rate banks earn by parking deposits with the RBI.

"The policy repo rate remains unchanged at 4.4 per cent, and the marginal standing facility rate and the bank rate remain unchanged at 4.65 per cent," he said.

Surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI, he noted.

He also said that it has been decided to conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of Rs 50,000 crore, to begin with, in tranches of appropriate sizes.

"The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of non-bank financial companies (NBFCs), with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and micro finance institutions (MFIs)," he said.

He also announced special refinance facilities for a total amount of Rs 50,000 crore to Nabard, Sidbi and National Housing Bank (NHB) to enable them to meet sectoral credit needs.

"This will comprise Rs 25,000 crore to Nabard for refinancing regional rural banks, cooperative banks and MFIs; Rs 15,000 crore to Sidbi for on-lending/refinancing; and Rs 10,000 crore to NHB for supporting housing finance companies," he said.

To provide greater comfort to the states for undertaking Covid-19 containment and mitigation efforts, the RBI announced a 30 per cent increase in the ways and means advances limit.

It has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020.

Pointing out that RBI is monitoring all macro parameters on a continuous basis, he said, economic activity has come to standstill during lockdown.

The impact of Covid-19 is not captured in the index of industrial production (IIP) data for February, he said, adding that the contraction in exports in March at 34.6 per cent is much more severe than global financial crisis of 2008-09.

He said vehicle production and sales declined sharply in March and so did electricity consumption.

Appreciating the effort of banks and other institutions in keeping the financial market operational, Das said, there was no downtime of internet or mobile banking during the lockdown and banking operations were normal.

Banks, financial institutions have risen to the occasion to ensure normal functioning during the outbreak of this pandemic, he noted.

Providing relaxation to lenders, Das said banks shall be exempted from making dividend payment in the light of financial difficulties posed by Covid-19.

On the inflation front, he said consumer price index (CPI) based inflation has declined in March and it is expected to further ease.

RBI will take advantage of the falling price situation and pass on benefit to borrowers, he hinted.