In a surprise move the Reserve Bank of India announced its monetary policy ahead of its April first week announcement. The repo rate was slashed by 75 basis points or 0.75% and stands now at 4.40%, down from the prevailing 5.15%. Repo rate is the rate at which banks borrow money from RBI to meet their short-term funding requirements. It is the benchmark for deposit and loan rates that prevail in the banking system.
While the world is going through its worst crisis in over a century, this rate cut is aimed at making borrowing cheaper for industries and help speed up production and create employment.
The GDP growth has been slashed to 3.5% for the coming financial year and the rate cut could be an antidote.
The RBI is also infusing liquidity by way of using various liquidity tools such as open market operations and repo auctions. The Cash Reserve Ratio (CRR) too has been reduced by 100 basis points or 1%; it is now at 3%, down from the earlier 4%. CRR is a risk management tool used by RBI wherein the banks have to compulsorily transfer a portion of the deposits into the central bank’s account at no interest. With this new reduction banks would have more funds at their disposal to lend freely to various productive sectors.
Most borrowers have been given moratorium on repayment of loans which is quite good considering the cash flow issues that would persist for a while due to stagnation of economic activity and contraction in money supply. Real estate segment too would benefit from this move.
For the home loan borrowers the next few months would be tough and trying; there could be salary issues and business income issues across the board.
Payment of EMIs could be an issue to handle. The government has taken measures for easing such pressures across all types of individual borrowers by requesting the lenders to go soft on the EMI repayments; hopefully the lenders would heed the request.
Common individuals should refrain from mindless spending and hold on to any major expenses in the coming months.
The post-COVID era would be quite different and would require a steely resolve to emerge unscathed.
