RBI’s steps to mitigate economic crisis

  • Category
    Economy
  • Published
    31st Mar, 2020

Context

In a massive decision, the Reserve Bank of India has announced that banks are permitted to allow a 3-month moratorium on payment of instalments of all term loans outstanding on March 1, 2020.

About

Repo Rate:

  • Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. 
  • This rate is used by the monetary authorities to control inflation in the country. 
  • In the event of inflation, RBI increases repo rate as the rate acts as a disincentive for commercial banks to borrow from the central bank. 

Reverse repo rate:

  • Reverse repo rate is the interest rate at which the RBI borrows money from commercial banks. It is a monetary policy instrument, used to control the money supply in an economy.

Bank Rate:

  • This is the long-term rate (Repo rate is for short term) at which RBI lends money to other banks.

Cash Reserve Ratio (CRR): 

  • Indian banks are required to hold a certain proportion of their deposits in the form of cash.
  • However Banks don't hold these as cash with themselves, they deposit such cash with the central bank, which is considered as equivalent to holding cash with themselves.
  • This minimum ratio is stipulated by the RBI and is known as the Cash Reserve Ratio.

Key-highlights of the decision:

  • The Reserve Bank of India governor announced a series of measures including a reduction in the repo rate, reverse repo rate, issuing a moratorium on EMI installments and more measures.
  • This decision applies to all regional, rural banks, co-operative banks, NBFCs including Housing Finance Companies.
  • The moratorium will not result in asset classification downgrade and will have no adverse impact on credit history of beneficiaries.
  • This is a part of the Central Bank's measures to counter the Coronavirus lockdown, which had started off with the RBI governor announcing massive slash in the key repo rate to 4.4%, to revive economic growth. 
  • Measures have also been announced to ensure liquidity.

Massive Repo rate cut:

  • The RBI's Monetary Policy Committee has voted in favour of an interest rate cut to the tune of 75 basis points, which brings the repo rate down to 4.4 percent from 5.15 percent.
  • The reverse repo rate has also been reduced by 90 basis points to 4 percent in a bid to maintain financial stability and revive growth.
  • At present, the outlook remains extremely uncertain and going forward much will depend on how India battles Covid-19 pandemic.

    Monetary Policy Committee:

    • The Monetary Policy Committee (MPC) is the body of the Reserve Bank of India headed by the Governor, responsible for taking the important monetary policy decision about setting the repo rate.
    • The main responsibility of the MPC is to keep the inflation targets set by the RBI.
    • The MPC decides the changes to be made to the policy rate (repo rate) to contain inflation within the target (based on CPI) level set under India’s inflation targeting regime.

Liquidity measures:

  • Apart from reducing key rates, the RBI also announced a slew of liquidity measures related to TLTRO, CRR and MLCR to ease mounting pressure.
  • It has been decided to reduce the Cash Reserve Ratio (CRR) of all banks by 100 basis points to 3% of Net Demand and Time Liabilities with effect from the fortnight beginning March 28 for a period of 1 year.
  • The announcement came just a day after the government unveiled a Rs 1.70 lakh crore relief package to shield poor people from the virus outbreak.
  • The RBI's relief measures announced in view of the Covid-19 pandemic stands at 3.2 percent of the GDP.
  • RBI has also been conducting many other monetary operations for better liquidity management as it scrambles to keep the banking sector healthy in a bid to support the economy in the wake of the novel coronavirus pandemic
X

© 2020 Basix Education Pvt. Ltd. All Rights Reserved