Covid-19: RBI slashes reverse repo rate by 25 bps, no change in repo rate

RBI Governor Shaktikanta Das
Addressing the media for the second time since the Narendra Modi government imposed a national lockdown on March 25, RBI Governor Shaktikanta Das announced a reduction in reverse repo rate by 25 basis points from 4 per cent earlier to 3.75 per cent now. The reduction in reverse repo rate is one of a slew of announcements made by the RBI governor today. This was his first address since the lockdown was extended till May 3 by the Prime Minister.

"The mission is to minimise the epidemiological damage in the country due to coronavirus. I want to convey the RBI's resolve and the way forward," said the RBI governor.

He also said that this is not the last of the announcements on financial support during the crisis, stating that the central bank will come up with responses in the future in the interest of the economy based on evolving situations.

Pointing out that the Reserve Bank of India (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 index of industrial production (IIP) data for February, he said, adding that contraction in exports in March at 34.6 per cent was 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.

Here are the additional measures announced by the RBI governor in his address today:

  • Liquidity management: Will undertake TLTRO 2.0 operations. LTRO of Rs 50,000 cr to begin with in many tranches for NBFCs
  • 50% of the funds in TLTRO 2,0 is for small and medium-sized NBFCs
  • A special Rs 50,000 crore refinance facility for Nabard (RS 25,000 crore), Sidbi (Rs 15,000 crore) and NHB (Rs 10,000 crore)
  • 60% of ways and means advances allowed to states until September 30, 2020
  • NPA classifications will exclude the three-month moratorium period till May-end
  • NBFCs allowed to grant relaxed NPA classification to their borrowers
  • Banks will need to maintain additional provisioning of 10 per cent on standstill accounts
  • LCR requirement brought down from 100% to 80% with immediate effect. LCR requirement to be restored to the previous level in a phased manner
  • Banks won't announce dividends until further notice
  • NBFCs' loans to delayed commercial real estate projects can be extended by a year without restructuring
  • Loans given by NBFCs to real estate companies to get similar benefit as given by scheduled commercial banks
Other highlights of the RBI Governor Shaktikanta Das' address to the media:
  • Macroeconomic landscape has deteriorated since March 27, 2020. The global economy is going through the worst phase since the Great Depression.
  • India is one of the few countries projected to hang on to - perhaps tenuously - 1.9% GDP growth, according to the IMF.
  • India expected to stage a smart recovery to grow at pre-coronavirus pace of 7% in FY21, according to the IMF
  • Every data on monsoon, sowing, fertilisers bode well for agri and rural outlook but situation is sombre in other industrial sectors.
  • The impact of Covid-19 has not been captured in recent IIP data.
  • The RBI has taken several steps to ensure normal functioning of banks.
  • No downtime has been observed for internet or mobile banking.
  • ATMs have worked at 91% capacity during this period.
  • Since March 27, surplus liquidity has increased sharply in the banking system.
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 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 said.

The rupee fell 0.55 per cent to a new record low of 76.86 against the US dollar on Thursday, while the equity indices have been on a see-saw in the wake of the coronavirus outbreak losing over 30 per cent since January.

The markets had responded on a positive note to the prospect of new announcements by the RBI to ease economic pain. After the RBI announced today's press conference through a tweet in the morning, the markets gave a thumbs up when they opened. The BSE Sensex climbed by more than 1,000 points ahead of the governor's address.

On March 27, RBI held a historic pre-term MPC (Monetary Policy Committee) meeting whererin the repo rate was cut by a record 75 basis points. The repo rate was reduced to a 15-year low of 4.40 per cent and was also the steepest cut since October 2004.

The same day, the central bank cut the cash reserve ratio by 100 bps to 3 per cent apart from announcing various measures to boost liquidity in the system.

There were calls that the 75 bps cuts was not sufficient and that RBI could go for more rate cuts and liquidity measures. Many brokerages had said RBI could slash the lending rates by another 100 bps.


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