The Reserve Bank of India (RBI) has opened up the liquidity floodgates for banks even as it reduced the key interest rate sharply by 75 bps and allowed equated monthly instalments (EMIs) to be deferred by three months in a move to fight the economic impact of the countrywide lockdown to check the spread of novel coronavirus .
The repo rate was reduced to by 75 bps 4.4% while the reverse repo rate was cut by 90 bps point to 4%. The higher reduction in the reverse repo rate was aimed at prompting banks to lend more rather than keeping their excess liquidity with the RBI.
Unprecedented crisis
“We are living through an extraordinary and unprecedented situation. Everything hinges on the depth of the COVID-19 outbreak, its spread and its duration,” RBI governor Shaktikanta Das said.
“Clearly, a war effort has to be mounted to combat the virus, involving both conventional and unconventional measures,” Mr. Das said.
The meeting of the Monetary Policy Committee (MPC) which was scheduled for March 31 and April 1,3, was advanced to March 27 due to the unprecedented crisis.
While cutting benchmark rates, the RBI has continued with its accommodative stance. Four of the six members of the monetary policy committee voted in favour of a 75 bps rate cut.
Apart from cutting the repo rate, RBI has also reduced the cash reserve ratio of banks which released ₹1.37 lakh crore liquidity. This, along with other measures, will see an infusion of ₹3.74 lakh crore into the banking system.
RBI has also allowed banks to defer payment of EMIs on home, car, personal loans as well as credit card dues for three months till May 31. Since non-payment will not lead to non-performing asset classification by banks, there will be no impact on credit score of the borrowers.
State Bank of India, the country’s largest lender, promptly responded to the RBI’s action and reduced the lending rates linked to a external benchmark and the repo rate by 75 bps. Interest rate on external benchmark linked loans was cut from 7.8% to 7.05% and those are linked to repo rate were cut to 6.65%. “Consequently, EMIs on Home Loan accounts get cheaper by around ₹52 per 1 lakh on a 30-year loan,” SBI said.
The bank added that a decision on marginal cost of funds based lending rate (MCLR), will be taken when the asset liability committee meets in April. SBI has also cut retail fixed deposit rate by 20-50 bps across all tenures.
Bulk deposit rates were reduced by 50 bps to 100 bps across tenors.
