RBI came true to its 'whatever it takes' promise with a slew of measures, that are being hailed as unique and appropriate for the current situation. The central bank cut the repo rate (the rate at which commercial banks borrow from the RBI) by 75basis points. Furthermore, through various measures, the RBI is looking to inject Rs 3.7 lakh crore of liquidity in the system. This would amount to about 3.2% of India’s GDP.

Despite the RBI dishing out a dynamic policy, the market remained indecisive and volatile throughout the day. Sensex closed 0.44% down at 29,815.59 while Nifty closed 0.22% up at 8,660.25. Coal India, Cipla and Axis Bank were the top gainers, while Bajaj Finance, Hero Motocorp and IndusInd Bank were the top losers on the bourses.

Notwithstanding the market's wayward response to the policy, an analysis of the measures taken by the RBI would provide much needed breathing space to the financial sector. Some of the measures taken, and their consequences are analysed:

Impact of Repo rate cut

The RBI cut the repo rate by 75 bps to 4.4%, thereby reducing the interest rate at which commercial banks borrow from the RBI. Since most commercial loans are linked to the repo rate (starting October last year), interest rates on home loans, term loans etc could also reduce commensurately. This would reduce interest burden on companies and individuals, and thereby unleash the investment and demand cycle in the economy.

Impact of Reverse Repo Cut

The reverse repo is the rate at which the central bank borrows money from India’s commercial banks. The RBI has reduced this by 90bps to 4%. This means that it is unattractive for banks to lend money to the central bank. Banks could utilize this liquidity to invest in investment-grade corporate bonds and commercial papers (instruments issues by companies to raise debt capital) and get yields as high as 6% (compared to 4% with the RBI).

Impact of CRR Cut

RBI has also reduced cash reserve ratio (CRR) requirement by 100 basis points for one year. Cut in CRR effectively means more liquidity with banks to carry out their lending activity. Cut in CRR also means opening a new window for banks to cut lending rates without necessarily cutting rates that it gives to its depositors.

Moratorium on term loans:

The RBI has also permitted all commercial banks, co-operative banks, all-India Financial Institutions, and NBFCs to allow a moratorium of three months on payment of instalments with respect to all term loans outstanding as on March 1, 2020.

It is a big relief for retail, SME and corporate borrowers. With the economy at a standstill, and no flow of money in the system, it would have been impossible to service their EMIs and interest repayments on time.

The moratorium on EMIs on all outstanding loans will ensure no impact on credit ratings on loan repayments. Further, the moratorium period will allow banks to keep their capital free by not having to provide for bad loans.

Key Takeaways:

In the fight against Covid 19, RBI has certainly dug deep into its repertoire to wage an effective battle. With these measures, the central bank has certainly set precedent of being amongst the world’s most dynamic and responsive central banks.