RBI intensifies fight against COVID-19, cuts repo rate

In a surprise move, the Reserve Bank of India (RBI), within a month, announced additional measures to intensify the fight against Coronavirus or COVID-19.

Through these measures the RBI looks to ensure sufficient liquidity in the banking system while trying to pump prime the sagging India’s economy which is expected to grow at a paltry 1.9% in the current fiscal.

In a major move, the RBI has freed up more capital for lenders to lend, announced a fresh Rs 50,000 crore targeted long-term repo operation (LTRO 2.0) to address the liquidity stress of shadow banks and microfinance institutions and hinted at the possibility of further rate cuts going forward.

RBI governor Shaktikanta Das has unveiled fresh measures aimed at maintaining adequate liquidity in the system, facilitating and incentivising banks to ensure better credit flow and enabling normal functioning of the financial markets.

RBI slashed the reverse repo rate by 25 bps to 3.75%, making it less attractive for commercial banks to park cash with the central bank.

The central bank expects inflation trajectory to fall below its target within a month or two, which will create more policy space for it to better address the challenges posed by the Covid-19 outbreak and the lockdown to check its spread.

Earlier on March 27, RBI had slashed the repo rate by 75 basis points to 4.40% from 5.15% to help the economy fight the Covid-19 pandemic.

Simultaneously, the reverse repo rate was cut by 90 basis points to 4% from 4.90% to ensure that banks don’t passively park funds with RBI and start lending to the productive sectors of the economy.

The central bank announced a special Rs 50,000 crore targeted long-term repo operation, called TLTRO 2.0, to address the liquidity needs of the NBFCs and microfinance institutions.

Banks availing these funds will be required to deploy the same within one month and 50% of the money has been earmarked for midsized NBFCs and MFIs.

The benefits of earlier TLTRO scheme went largely to PSUs or large corporations. Through TLTRO 2.0, more capital will be made available to the shadow banking and microfinance sectors.

Further, the 90-day non-performing assets norm will not apply on moratorium granted on existing loans by banks.

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