Sunday , January 24 2021

RBI cuts the repo rate by 75 bps

In an emergency meeting, RBI’s monetary policy committee (MPC) on Friday cut the repo rate, the rate at which banks borrow from RBI, by 75 basis points (bps) to 4.40%. With this rate cut, RBI has reduced policy rates by 210bps since February 2019.

The central bank announced in the morning that it is permitting banks to defer installment payments on all term loans and working capital loans by three months. However, later in the day, it clarified that this is also applicable to retail loans, farm loans, and credit dues. This will come as a relief to many credit card holders hit by pay cuts.

Governor Shaktikanta Das’s monetary stimulus comes a day after finance minister Nirmala Sitharaman unveiled a ₹1.7 trillion relief package aimed at meeting the basic needs of the poor who have faced the brunt of an unprecedented 21-day lockdown announced by Prime Minister Narendra Modi.

The monetary policy panel also decided to maintain an accommodative stance as long as necessary to revive growth and mitigate the impact of COVID-19.

The MPC met earlier this week, ahead of its earlier schedule of 3 April. While all six members of the committee were unanimous in deciding to cut rates, they voted 4:2 to reduce the policy rates by 75bps. To discourage banks from parking funds with RBI, the central bank also announced a cut in reverse repo rate by 90bps to 4%. During March, banks have parked a daily average of as much as ₹3 trillion with the RBI using the reverse repo window. The difference between the repo and reverse repo window now stands at 40bps from 25bps earlier. Typically, a cut in repo rate translates into an equivalent amount of reduction in reverse repo rate.“This decision and its advancement have been warranted by the destructive force of the coronavirus. It is intended to mitigate the negative effects of the virus, revive growth and above all preserve financial stability,” Das said.