RBI maintains status quo; rates unchanged
The Reserve Bank of India (RBI) kept rates steady at record low levels as widely expected on Friday and reiterated that it will continue to support the recovering economy by ensuring ample rupee liquidity in the banking system.
The repo rate or RBI’s key lending rate was held at 4% while the reverse repo rate or its borrowing rate was left unchanged at 3.35%.
Repo rate is the interest at which the RBI lends to the banks and has some influence on the interest at which banks in turn lend to their borrowers.
This RBI believes that the need of the hour is to back growth. At lower interest rates, people will borrow and spend more, and businesses will borrow and expand. The plan is to continue this policy through this financial year and next. The other aim of low interest rates is to help the government continue financing its massive fiscal deficit this year and next, at low interest rates.
The RBI projected GDP growth to be at 10.5% for 2021-22.
After breaching upper tolerance threshold continuously, CPI inflation in December fell to 4.59%, the first time in nine months that inflation came within the central bank’s comfort zone.
The apex bank also allowed Non-Banking Financial Companies (NBFCs) to tap into the Targeted Long Term Repo Operations (TLTRO), a scheme worth Rs 1 trillion, to provide liquidity support.
With a view to increasing the focus of liquidity measures on revival of activity in specific sectors that have both backward and forward linkages and having multiplier effects on growth, the RBI had announced the TLTRO on Tap Scheme on October 9, 2020 which is available up to March 31, 2021.
The RBI decided to restore cash reserve ratio (CRR) in two phases. In the first phase, the CRR will be raised to 3.5% from March 27 and subsequently to 4.0% from May 22.
To help banks tide over the disruption caused by the pandemic, the CRR of all banks was reduced by 100 basis points to 3.0% of net demand and time liabilities (NDTL) effective from the reporting fortnight beginning March 28, 2020.
Aimed at providing comfort to banks on their liquidity needs, the Marginal Standing Facility (MSF) relaxation will be continued for six more months, i.e., up to September 30, 2021.
Interestingly, the RBI has proposed to allow retail investors to buy government bonds directly online through the facility called Reserve Bank (Retail Direct).
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