RBI Revised Repo Rate during Covid-19 Pandemic

Varun Hariharan

24 Nov, 2020

Repo Rate is the rate at which the Reserve bank of India (RBI) lends money to commercial banks in case there is any shortage of funds. It is considered as the rate at which banks borrow money by selling specific securities to the RBI.  Reverse repo rate is when the RBI borrows money from the commercial banks. This usually happens when there is more liquidity in the market.

On 27 March 2020, the Governor of the RBI Mr Shaktikanta Das has announced that due to the current economic conditions prevailing in the society, the new RBI revised repo rate would be 4.40%. There has been a significant change in the repo rate because of the Covid-19 pandemic. Previously, the repo rate set by RBI was 5.15%. Now due to the scenario, there has been a 75 basis point cut (BPS), and the RBI revised repo rate is prevailing at 4.40%. The monetary policy committee (MPC) along with the Governor has come to a consensus to consider the norms for the RBI Revised Repo Rate, and this will be during the period of monetary uncertainty due to the Covid-19 pandemic.

After the Finance Minister Mrs Nirmala Sitaraman released a package of 1.7 trillion to reduce the impact of the ongoing Covid-19 pandemic and a lockdown of 21 days, the RBI has considered taking this drastic step. The reason for carrying out this step is to ease the hardship faced by both banks and consumers. The RBI has made an urgent step and conducted meetings on 24, 26 and 27 March 2020 to come up with the RBI revised repo rate. These discussions were supposed to be scheduled in April 2020.

In the assessment meeting between the MPC and the Governor, the following points were discussed:

• To reduce the policy repo rate under the liquidity adjustment facility (LAF) from 5.16% to 4.40%. This is the RBI revised repo rate.
• The reverse repo rate has been cut by 90 basis points reduced to 4 %. The previous reverse repo rate stands at 4.90%.
  
• Requirement for the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.65 per cent from 5.40 per cent.
• Cash Reserve Ratio (CRR) of all banks has been reduced by 100 basis points to 3.0 % of the net demand and time liabilities.
• The MPC also decided to continue with this plan as long as it is necessary to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy while ensuring that inflation remains within the target
• In terms of working capital facilities, lending institutions are allowed to defer payments for three months concerning the payment of interest. The accumulated interest over the period will be paid after the period of delay.
  
• The RBI has also asked lending institutions to reassess the working capital requirements of borrowers.
• As per the Basel Committee on Banking Supervision (BCBS), there is a requirement for Indian Banks to Net Stable Funding Ratio (NSFR). This provides a bank to understand and fund their activities adequately. All the banks in India will be required to have NSFR to 100 % from 1 April 2020 to October 2020.
  
• Basel Standards require banks to have Capital Conversion Buffer (CCB). This acts as a capital buffer.  CCB has to be implemented in tranches 0.625 % from 31 March 2019 to 31 March 2020.
  
• Indian Banks can participate in Indian Rupee (INR) Derivate Market- Offshore NDF (Non-Deliverable Forward) Rupee Market. Banks which have the International Financial Services Centre can participate in the NDF market from 1 June 2020. Banks can take part in this through their branches in India or Foreign Branches.
  
• The above considerations were carried out with immediate effect.

Considerations leading to the RBI Revised REPO Rate

Some of the factors which brought out this ultimate decision are the following:

• Due to the global outbreak of Covid-19, the world economy has similarities to the 2008 recession, which had sweeping effects.
  
• Because of Covid-19, there are increased measures for countries to adopt the requirement of social distancing and governments are imposing lockdowns.
  
• There are far-reaching consequences because of the Covid-19 outbreak based on its intensity, rate of infections and duration.
• Markets around the world have become unstable due to the spread of Covid-19.
• Global Supply chains have been affected due to the closure of the business. This will be a problem for emerging economies which are highly reliant on the rest of the world.
  
• Due to these factors, Central banks have taken strict action towards their respective monetary policies to control the economy, until the situation stabilises.
  
• On the domestic front, many industries have been impacted due to the pandemic. From the airline sector to the retail sector, there has been a crunch in the amount of spending carried out by companies.

Read, More: Finance Bill 2020 Passed by Lok Sabha.

Based on the above scenario, the MPC considered that on the macroeconomic front, all businesses would be affected. There is a requirement to conserve the economic scenario of the country due to the Covid-19 pandemic.  Government has brought out various amounts of fiscal measures to fix this situation. Furthermore, the Government of India has addressed this scenario by injecting funds on a national level to help the economy sustain in such a situation. RBI has taken sufficient measures to improve the liquidity crisis.

One of the measures is the RBI revised repo rate for consumers. This will indirectly affect consumers whose equated monthly instalments (EMI) payment would be decreased because of RBI Revised Repo Rate. The Governor also stated that the non-payment of EMIs during this period would not classify the asset as a downgraded asset. This move also includes a three-month moratorium of instalment payment on terms loans and interest on working capital loans. The RBI has further permitted Banks and NBFCs to allow a moratorium of 3 months on repayment of term loans outstanding on 1 March 2020. This means that borrowers would not need to pay the loan EMI instalments during the period of the moratorium.  The RBI has considered that the EMI instalment payment would not affect the credit rating of the borrower.

Effects of the RBI revised REPO Rate

• Interest charged on loans will be reduced to consumers.
• EMI payments will be relaxed in the wake of this scenario.
• Moratorium on term loans for a period of three months- EMI for the loans would not be required to be paid.
• Cash Reserve Ratio of Banks has been reduced.
• Net Stable Funding Ratio (NSFR) is required to be established according to the BCBS
• CCB has been considered to be in the form of tranches.
• Indian Banks can take part in offshore derivate market (NDF).

The RBI Revised Repo Rate is making sure that there is sufficient liquidity in the markets once the Covid-19 pandemic is eradicated. However considering the lockdown in the country, the RBI has taken immediate measures to ease the liquidity crisis and tension faced by borrowers.

Conclusion

RBI has taken emergency measures in the wake of the Covid-19 pandemic to stabilise the liquidity in the market. RBI revised repo rate from 5.14% to 4.40% is one of the measures which will ensure the markets are controlled. This revised repo rate would affect consumers when repaying the EMI on the loans. Apart from the above considerations, the RBI has also implemented changes in the moratorium period applicable to term loans, changes in the CRR Ratio, the requirement of having a Net Stable Funding Ratio (NSFR), CCB in the form of tranches and delay of payment on working capital facilities. This fiscal move is crucial to deal with circumstances affecting the economy.

For the official press release in this regard, please refer below the link: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=49582.

See Our Recommendation: FM Announced Relief Measures Related to Covid-19 Outbreak.