RBI unveils measures to boost liquidity in financial system during Covid-19 crisis

The Reserve Bank on Friday announced a slew of measures to infuse liquidity in the financial system including a cut in the reverse repo rate, Rs 50,000-crore targeted long-term repo operations (TLTRO) and refinancing facilities for Nabard, Sidbi and NHB.

Drawing comfort from the surplus liquidity in the system, the governor slashed the reverse repo rate by 25 basis points to 3.75 per cent.

The reverse repo rate is the rate banks earn by parking deposits with the Reserve Bank of India (RBI).

"In order to encourage banks to deploy these 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," he said.

Emphasising that the RBI has moved in a calibrated fashion to ensure conducive financial conditions and normalcy in the functioning of financial markets and institutions, he said, the initial efforts to provide adequate system level liquidity are reflected in the sizable net absorptions under reverse repo operations.

With this achieved, the RBI has undertaken measures to target liquidity provision to sectors and entities which are experiencing liquidity constraints and/or hindrances to market access.

To ensure cash availability, RBI supplied fresh currency of Rs 1.2 lakh crore from March 1 till April 14, 2020, to currency chests across the country to meet increased demand for currency in the wake of the Covid-19 pandemic.

With a view to enhance liquidity flow to the shadow the banking sector, RBI launched a TLTRO window 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 NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs," he said.

To further provide liquidity, the RBI provide Rs 50,000 crore refinance window to all India financial institutions (AIFIs) such as the National Bank for Agriculture and Rural Development (Nabard), the Small Industries Development Bank of India (Sidbi) and the National Housing Bank (NHB).

These institutions raise resources from the market through specified instruments allowed by the RBI, in addition to relying on their internal sources.

"It has been decided to provide special refinance facilities for a total amount of Rs 50,000 crore to Nabard, Sidbi and NHB to enable them to meet sectoral credit needs," he said.

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

Advances under this facility will be charged at the RBI's policy repo rate at the time of availment.

To improve liquidity needs of states, RBI earlier this month had announced an increase in the ways and means advances (WMA) limit of states by 30 per cent.

"It has now been decided to increase the WMA limit of states by 60 per cent over and above the level as on March 31, 2020 to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts, and to plan their market borrowing programmes better.

"The increased limit will be available till September 30, 2020," he said.