The RBI on Friday 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 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 (RBI) 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".
Das said the GDP growth projection of 4.7 per cent in January-March quarter, which was necessary for India to achieve a 5 per cent growth rate in full 2019-20 fiscal, is "now at risk from the pandemic's impact on the economy".
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 to deal with the economic impact of the unprecedented 21-day nationwide lockdown, the most far-reaching measure undertaken by any government to curb the spread of the coronavirus pandemic that has killed at least 17 people in the country so far.
The lockdown has resulted in the closure of businesses as well as factories and temporary unemployment for thousands of workers.The lockdown followed by suspension of train, flight and long-distance bus services last week.
"A war effort has to be mounted and is being mounted to combat the virus involving conventional and unconventional measures in a continuously battle-ready mode," Das said, adding that the rate cut is aimed at supporting economic growth as long as necessary and to mitigate the impact of Covid-19. "It is worthwhile to remember tough times don't last, only tough people and tough institutions do".
While Prime Minister Narendra Modi said the RBI announcements will "improve liquidity, reduce the cost of funds, help middle class and businesses", Finance Minister Nirmala Sitharaman said, "the three-month moratorium on payments of term loan installments (EMI) and interest on working capital give much-desired relief".
But the reduced "interest rate needs quick transmission" to consumers by banks, she said.
SBI Chairman Rajnish Kumar said "the large rate cut, the adjustment in capital conservation buffer, the moratorium on repayments and the 'bazooka' of conventional CRR cut and unconventional liquidity measure of incentivising banks to support CP market - all will help financial markets stabilise, lead to immediate rate transmission and address the credit needs of the real economy".
Cyril Shroff of Cyril Amarchand Mangaldas said the "RBI has unleashed a bazooka to deal with the economic pain and uncertainty prevailing" and provides a much-needed respite for borrowers and lenders.
Das said macroeconomic fundamentals of the Indian economy are sound and stronger than those in aftermath of the 2008 global financial crisis.
While the entire six-member committee favoured an interest rate cut, they differed on the size of the reduction, and voted in a 4-2 split to slash rates by 75 basis points, Das said.
He said the purpose of lowering reverse repo was to "make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy".
This was the first time in five years that the RBI has acted outside the scheduled dates for policy meetings. The monetary policy committee (MPC) was originally scheduled to meet on April 1-3. The last time RBI cut rates in an out-of-turn move was in March 2015 following a budget announcement.
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