The Reserve Bank of India on Friday slashed the repo rate, or the interest rate at which the top bank lends to commercial banks, by 75 basis points to 4.4%. The reverse repo rate was also cut by 90 basis points to 4%, said RBI Governor Shaktikanta Das. The reverse repo rate is the rate at which the central bank borrows money from commercial banks.
Details of RBI’s “unscheduled meeting” of its Monetary Policy Committee between March 24 and 27 came a day after a relief package was announced by the government to help the poor tide over the impact of the countrywide lockdown that is in place to contain the spread of the Covid-19 pandemic. The country entered a 21-day period of complete lockdown on Wednesday in a bid to break the chain of transmission of the highly contagious coronavirus.
Four out of the six members of the Monetary Policy Committee voted in favour of the move, the RBI governor said. Das said global economic activity has come to a near standstill due to the lockdowns and social distancing in several countries. “Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed,” he added. “The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. There is a rising probability that large parts of the world will slip into recession. The government has taken good measures and we must ensure we do all we can to win this battle against the coronavirus.”
Das announced that all commercial banks and non-banking financial corporations will be permitted to allow a three-month moratorium on payment of installments of all term loans. The RBI also decided to reduce the Cash Reserve Ratio of all banks by 100 basis points. Cash Reserve Ratio is the amount of cash commercial banks have to mandatorily deposit with the Reserve Bank of India. “This would release liquidity worth Rs 1,37,000 crore within banks,” Das added.
The RBI governor admitted that the financial markets are under severe stress. “Finance is the lifeline of the economy, keeping it following is the paramount objective of the Reserve Bank of India at this point of time,” he added.
Das promised that Indian banks are safe and there was no need to resort to panic withdrawals. “In recent past, Covid-19 related volatility in stock market has impacted share prices of banks as well as resulting in some panic withdrawal of deposits from a few private sector banks,” said Das. “It would be fallacious to link share prices to the safety of deposits. Depositors of commercial banks including private sector banks need not worry on the safety of their funds.”
The risk the Covid-19 pandemic poses to the Indian economy is exacerbated by recent poor growth. India’s economic growth had slipped to a nearly seven-year low of 4.7% in the October-December quarter, according to government data.