Coronavirus contingency: RBI fires a bazooka

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Published: March 28, 2020 2:30:57 AM

Indranil Sengupta, chief economist Bank of America, wrote he expects the RBI to cut the repo by 25bps each in June and October.

Banks have found it better to leave some Rs three lakh crore with the central bank rather than lend the money. Banks have found it better to leave some Rs three lakh crore with the central bank rather than lend the money.

Reserve Bank of India (RBI) on Friday took steps to lower interest rates and to ease the strain on borrowers, both businesses and individuals, by allowing them a three-month repayment holiday on term loans. The central bank also put close to Rs four lakh crore more in the hands of banks but made it less attractive for them to park money with the central bank.

More than the chunky 75 basis points cut in the repo rate – to 4.4% — it was the 90 basis points slash in the reverse repo rate to just 4% which stole the show. Given banks borrow from depositors at higher than 4% it would now be pointless for them to park their funds with the RBI. Banks have found it better to leave some Rs three lakh crore with the central bank rather than lend the money. Indeed, RBI governor Shaktikanta Das observed the purpose of dropping the reverse repo rate was to make it relatively unattractive for banks to passively deposit funds with the central bank instead of lending them.

The RBI also announced a long-term line of credit of Rs one lakh crore that can be accessed by banks, mutual funds and NBFCs which must be used to lend to companies. All lenders are expected to tap this source of funding since the bonds can be held till they mature and need not be marked-to-market. While highly–rated companies will benefit, it remains to be seen whether lenders will lend to businesses that aren’t doing so well.

The cut in the repo will bring down the cost of wholesale money and have a salutary effect on rates in the system. Moreover, the 1% cut in the cash reserve ratio (CRR) leaves banks with an extra Rs 1.4 lakh crore to lend. Pranjul Bhandari, chief economist, HSBC, wrote that all the measures will not just help immediately, but should also help in the reconstruction process after the Covid shock abates. “All eyes are now on the fiscal deficit and what role the central bank will play in funding it,” Bhandari observed.

Economists expect further cut in rates over the course of the year. Indranil Sengupta, chief economist Bank of America, wrote he expects the RBI to cut the repo by 25bps each in June and October. “Second, Delhi would likely follow up with a fiscal stimulus — of 1-1.5% of GDP — funded by an RBI OMO,” Sengupta observed adding that the RBI could continue to intervene up to $30 billion to stabilise the rupee.

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