RBI Repo Rate Cut - 3-Month Moratorium on Loans


In an emergency move on Friday, 27th March 2020, the Governor of the Reserve Bank of India, Mr. Shaktikanta Das has slashed - by 75 basis points - its key lending rate. This measure was taken to counter the toll the coronavirus is currently taking on the Indian economy.
The meeting, which was originally scheduled for a bi-monthly policy meeting in April, was changed to an unscheduled emergency meeting of the RBI Monetary Policy Committee. This move was voted for by 4 out of 6 members of the committee.

According to the Governor, “The economic outlook globally is uncertain and obviously negative... Financial stability is the topmost priority of the RBI in this crisis.”

Here are the key take-aways things to keep in mind:

The Repo Rate is the key interest rate of the RBI. It is at this rate that it gives short-term loans to commercial banks. Now, in this situation today the repo rate cut was of the largest magnitude ever done so far. Previously, the largest cut delivered was 35 basis points in August 2019.

Additionally, a 100 basis point cut was announced in the Cash Reserve Ratio for 1 year. This step is taken to ensure that there will be adequate liquidity system-wide. Cash reserve ratio is the amount of money in cash banks have to keep with the RBI. This step is to release liquidity as much as Rs. 1,37,000 crores in all banks.

A 3-month moratorium period on loans is presented by the RBI to banks and other lenders. This is done to ensure that there is enough credit flow. This stage will benefit banks as well as the common man by allowing them a relief in these hard times.

According to Mr. Das, the priority now is to have ‘strongand purposeful action“ for protecting the Indian economy in its fight against Covid-19. The economic outlook globally is uncertain and obviously negative... Financial stability is the topmost priority of the RBI in this crisis

The step to change the repo rate was taken to safeguard the Indian economy at a time when the coronavirus is visibly affecting the industry.

The Governor or the RBI has reassured citizens by saying “Indian banking system is safe and sound... In spite of the challenging environment, I remain optimistic.”

The Reserve Bank Of India has already given a stimulus package to the industry, in the form of Rs. 2.7 lakh crore to India’s financial system. This step was carried out after RBI’s February policy meeting. The RBI’s current liquidity injection ratio to the country’s GDP is 3.2%. Mr. Shaktikanta Das further says that if any other steps are required to be taken to safeguard that Indian economy, they shall be taken. On Thursday, 26th March 2020, 1.7 lakh crore as a fiscal package was provided to support the poor through food security measures and direct cash transfers. However, details as to how this would be implemented was not provided.

Currently, India is looking at the lowest GDP expansion since the global financial crisis of 2008-2009. Many economists predict a bigger blow to the economy because of the coronavirus outbreak.

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