The Reserve Bank of India (RBI) slashes key rates to record low, boosts liquidity, orders reprieve of 3 months on loan repayments, and scraps inflation and growth forecasts for the year

The RBI announced a series of emergency measures — cutting interest rates to a record low, boosting liquidity by Rs 3.7 lakh crore and ordering a moratorium on loan repayments — to counter the economic pain inflicted by the coronavirus pandemic. The move soothed industry concerns over India’s central bank lagging behind those of other countries in taking action.

“A war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode,” governor Shaktikanta Das said. “Life in the time of Covid-19 has been one of unprecedented loss and isolation. Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do.”

The move followed the government announcing a Rs 1.7 lakh crore package on Thursday to put a safety net in place for those hit the hardest. India began a 21-day lockdown on March 25 to try and rein in the disease.

“Since the last MPC (Monetary Policy Committee) meeting of February 2020, the Reserve Bank has injected liquidity of Rs 2.8 lakh crore through various instruments, equivalent to 1.4% of our GDP,” the RBI said.

SBI to Pass On Cut to Borrowers
“Together with the measures announced today (Friday), RBI’s liquidity injection works out to about 3.2% of GDP,” the central bank said.

The RBI cut the key policy repo rate by 75 basis points to a historic low of 4.4%. It also lowered the cash reserve ratio (CRR), the proportion of cash that banks need to keep with the RBI, as part of its liquidity measures. One basis point is 0.01 percentage point. During the global financial crisis, the repo rate — at which the central bank lends to banks — was cut to a low of 4.75%.

The State Bank of India said late on Friday that it would pass on the 75 bps cut to borrowers of loans based on the external benchmark-linked lending rate (EBR) and repo-linked lending rate (RLLR).  “RBI may have lagged somewhat in speed. It has certainly made up in magnitude with its announcements today,” said Suyash Chaudhry, head of fixed income at IDFC Mutual Fund.

Governor Das promised that the central bank would do more if needed.

“The Reserve Bank is at work and in mission mode, monitoring the evolving financial market and macroeconomic conditions; and calibrating its operations to meet any need for additional liquidity support as well as other measures, as may be warranted,” said Das. “It is our effort to ensure normal functioning of markets, nurture the impulses of growth and preserve financial stability.”

Notably, the monetary policy committee scrapped the inflation and growth forecasts for the year as the impact of Covid-19 is unpredictable.

A three-month moratorium on loan repayments was declared across the board for companies and individuals. Banks have been given leeway in determining working capital cycles and limits to help corporate borrowers tide over the current crisis. Individuals with home and car loans will get a similar three-month relief in repaying loans. Loan tenors will get extended accordingly.

“The moratorium is being provided specifically to enable the borrowers to tide over the economic fallout from Covid-19,” Das said in a televised address. “Hence, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade.”

The six-member monetary policy committee (MPC), which met ahead of schedule, voted four to two in favour of the cut. It had earlier been scheduled to meet on March 31. The reverse repo rate, at which the RBI pays banks when they park surplus funds, was cut by a more than proportionate 90 basis points to 4%. That’s expected to force banks to lend rather than keep money with the RBI.

The RBI joins peers across the globe from the US Federal Reserve to the Bank of England in slashing borrowing costs and flooding the market with liquidity. While many regulators had been quick in delivering rate cuts to calm investor nerves, they were also blamed for sparking a knee-jerk reaction that saw the effects vaporising in a few days. The RBI on the contrary faced flak for not moving quickly enough, but has now come up with a package that addresses various segments — companies, individuals and the financial markets.

The benchmark bond rallied 24 basis points to 5.98% but pared some gains to end at 6.14% versus 6.22% on Thursday. The Sensex erased a 4% gain to end 0.44% lower at 29,815.59 points. The rupee gained 0.40% to 74.85 against the dollar. “By providing a three-month moratorium on all loans, the borrowers will get relief for the time being or until the health crisis alleviates,” said Padmaja Chundru, chief executive, Indian Bank.

The liquidity-enhancing measures, including the CRR cut to 3% of net demand and time liabilities (NDTL) from 4%, are expected to make the banking system flush with funds. The cut takes effect from the reporting fortnight beginning March 28. This is expected to release primary liquidity of about Rs 1.37 lakh crore “RBI has delivered more than what was being expected and frontloaded a lot of the measures which markets were expecting to see if the economic situation visibly deteriorated,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank.

The central bank will conduct targeted long-term repo auctions after which banks have to invest the money they get as part of the exercise in the bonds of companies, both in the primary and secondary markets. This is aimed at cooling the recent spike in bond yields.

In recent days, the money market has been witnessing friction in interest rates in the call money market – a key barometer of financial market health – rising. The spread between the repo rate and the call rate, which used to be a few basis points, has surged to as high as 60 basis points.

There was speculation that some banks were not being loaned money due to risk perceptions.

Das reiterated that there is no risk to the system and all deposits are safe. To give comfort to some banks, which other lenders may be wary of dealing with, the RBI raised borrowing limits under the Marginal Standing Facility, where it charges penal rates. Banks can now borrow up to 3% of their government bond holdings under the Statutory Liquidity Ratio, from 2% earlier.

Owing to persistent excess liquidity, the policy rate corridor has been widened to 65 bps from 50 bps, the RBI said. The reverse repo rate is 40 bps lower than the policy repo rate while the MSF rate will continue to be 25 bps above the repo rate, it said.

The three measures relating to longterm repo, CRR and MSF will inject a total liquidity of Rs 3.74 lakh crore into the system, the RBI said.