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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.
Some of the factors which brought out this ultimate decision are the following:
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.
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
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.
Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.
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