In a move to infuse sufficient liquidity into the banking system, the Reserve Bank of India has reduced the cash reserve ratio (CRR) requirement by 100 bps, increased the cap for liquidity available under the marginal standing facility, and will auction long-term repo of ₹1 lakh crore. These three measures will infuse ₹3.74 lakh crore into the banking system.
The cash reserve ratio — the proportion of liabilities which a bank has to set aside as cash — has been reduced from 4% to 3%. The 100 bps reduction in CRR will free up ₹1.37 lakh crore liquidity for the banks. For State Bank of India, lowering of CRR will release ₹31,000 crore.
The minimum daily requirement of maintaining CRR balance has also been reduced to 80% from 90%, effective from the first day of the reporting fortnight beginning March 28, 2020. “This is a one-time dispensation available up to June 26, 2020,” the RBI said.
Banks do not earn any interest for maintaining CRR balance. With this reduction, they can deploy the liquidity in interest-earning assets.
RBI also increased liquidity available to banks under the marginal standing facility from 2% of the statutory liquidity ratio (SLR) to 3% with immediate effect. This measure will be applicable up to June 30, 2020.
“This measure should provide comfort to the banking system by allowing it to avail [itself of] an additional ₹1,37,000 crore of liquidity under the LAF window in times of stress at the reduced MSF rate announced in the MPC’s resolution,” the RBI said.
The monetary policy committee reduced the repo rate by 75 bps to 4.4% and consequently the MSF rate was reduced to 4.65%.
Observing that large sell-offs in the domestic equity, bond and forex markets had intensified redemption pressures, the central bank decided to infuse ₹1 lakh crore through targeted long-term repo operations (TLTRO).
The RBI will conduct auctions of targeted term repos of up to three years’ tenor for a total of up to ₹1 lakh crore at a floating rate, linked to the policy repo rate. “Liquidity availed under the scheme by banks has to be deployed in investment grade corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020,” the RBI said.
RBI also said investments by banks under this facility would be classified as held-to-maturity (HTM) even in excess of 25% of the total investment permitted to be included in the HTM portfolio.
