Speaking to the media on the unprecedented situation across the country due to the Chinese epidemic, RBI Governor Shaktikanta Das on Friday announced a massive 75 basis points cut in repo rates to 4.4 per cent as a measure to counter the economic slowdown caused by the COVID-19 pandemic.
The reverse repo rate has been cut by 90 basis points to 4 per cent. Governor Das said this has been done to make it unattractive for banks to passively deposit funds with the RBI and instead lend it to the productive sectors.
Addressing the media, Das said that the Monetary Policy Committee (MPC) has decided to advance its meeting to this week and undertook a careful evaluation of macroeconomic and financial conditions.
Governor Das added that MPC voted for a sizable reduction in repo rate and has decided to maintain an accommodative stance. There were some differences in the quantum of reduction and MPC voted by 4:2 majority to reduce policy repo rate by 75 bps to 4.4 per cent, he added.
Liquidity Adjustment Ratio (LAF) has been cut by 90 bps to 4 per cent and Cash Reserve Ratio (CRR) cut by 100 bps to 3% of NTDL with effect from March 28, 2020, the Governor added.
“India has locked down economic activity. Keeping finance flowing is the paramount objective of the RBI. Financial activity is under severe stress,” the RBI Governor noted.
Shaktikanta Das also added that the central bank has taken several measures to inject substantial liquidity into the system. He added that the priority is to undertake strong and purposeful action to protect domestic economy. He also urged all the stakeholders to fight against the pandemic and asked banks to do all they can to keep credit flowing.
RBI Governor also added that the economic outlook is highly uncertain and negative.
“Appropriate that MPC decisions and other RBI actions must be seen as a comprehensive package with force multipliers. The first measures are to expand liquidity in the system. Strong fiscal steps necessary to deal with the situation, steps to enforce monetary transmissions and efforts to ease financial stress caused by COVID-19,” the Governor added.
Addressing the effect of the coronavirus on markets, the RBI Governor said that the large sell-offs in markets have intensified pressure on the economic system an RBI will conduct auctions of long term repo operation (LTRO) of three-year tenure up to Rs 1 lakh crore at a floating rate linked to the policy rate.
According to the RBI, these measures will result in total liquidity injection of Rs 3.74 lakh crore to the system.
The most important notification put out by the RBI on Friday was that all commercial banks have been allowed to grant a three-month moratorium on payment of instalments for all loans outstanding on March 1, 2020. Similarly, banks are also permitted to defer interest payment on working capitals by 3 months. These measures have been put in place to mitigate debt servicing burden to prevent transmission of financial stress to the real economy, provide relief to borrowers.
“All banks, lending institutions may allow a three-month moratorium on all loans,” said RBI Governor.
He added, “Lending companies, banks are allowed to defer interest on working capital repayments by three months. Banks may also reassess the working capital cycle and will not be treated as non-performing assets”.
RBI Governor Das also assured that the Indian banking sector is safe and sound. He added that the depositors of commercial banks including private banks need not worry about the safety of their funds. RBI has injected liquidity of Rs 2.8 lakh crore through various instruments equal to 1.4 per cent of the GDP, the Governor added.
“Along with today’s measures liquidity measures equal to 3.2% of GDP. RBI will take continuous measures to ensure liquidity in the system,” Shaktikanta Das added.
The central bank also added that the depositors should not resort to the panic withdrawal of their deposits. The Governor urged the depositors in private banks to not indulge in panic withdrawal.
“The macros are stronger than what it was post the financial crisis, the fiscal deficit and CAD is much lower and inflation conditions are benign. I remain optimistic despite current challenges. COVID-19 is upon us but this to shall pass. Stay clean, stay safe and go digital,” he added.
The RBI Governor’s press conference comes a day after Finance Minister Nirmala Sitharaman had unveiled a Rs 1.75 lakh-crore welfare stimulus package to the country. Her announcement came as 21-day nationwide lockdown began on Wednesday to curb the spread of highly contagious illness.
“No one will go hungry”, the Finance Minister had said, announcing relief under the Rs 1,75,000-crore package, dubbed as “Prime Minister Gareeb Kalyan scheme”.
The central government’s immediate focus is on alleviating the hardships of the migrant workers, urban and rural poor, she had added. The relief measures announced had included direct cash transfers (under the DBT or Direct Benefit Transfer scheme) and food security-related steps aimed at giving relief to the poor workers hit by the countrywide lockdown.
The government also announced a special Rs 50 lakh medical insurance cover to the frontline workers toiling to avert the crisis. “With a deep sense of gratitude, I announce that all medical staff, Aasha workers, paramedics, doctors and nurses, will get this insurance,” Finance Minister Sitharaman had said, quoting Prime Minister Narendra Modi’s reference to them as “Gods in white”.