Following the lead of the Union Government announcing Rs.1.7 lakh crore relief package yesterday, the Reserve Bank of India (RBI) announced several measures to fight the economic impact of the spread of coronavirus. Among other measures, the Monetary Policy Committee (MPC) decided to cut the Repo rate by 75 basis points and the Reverse Repo rate by 90 basis points. Also, the regulator announced a 3-month EMI Moratorium on all outstanding loans.

Here are the highlights of the announcement:

  • RBI to conduct auctions of TLTRO (Targeted Long-Term Repo Operation) of up to 3-year tenor for a total amount of Rs. 1 lakh crore at a floating rate linked to the policy repo rate.
  • RBI has reduced the CRR (Cash Reserve Ratio) requirement of all banks to 3% from March 28, 2020.
  • The Statutory Liquidity Ratio (SLR) of the Marginal Standing Facility (MSF) was increased from 2% to 3% up to June 30, 2020.
  • All lending institutions allowed to extend a three-month moratorium on repayment of installments for term loans outstanding as on March 01, 2020.
  • These institutions are also allowed to defer three months of payment of interest on all such working capital facilities outstanding as on March 01, 2020.

For a layman, these announcements might not make a lot of sense. So here’s how these measures can benefit you:

What is the Repo Rate and Reverse Repo Rate and How Does it Affect Me?

In the simplest terms, Repo rate is the rate at which the RBI lends money to banks and Reverse Repo rate is the rate at which the RBI borrows money from banks. So, when the Repo rate is reduced, banks can make more money from RBI if needed.

On the other hand, when the Reverse Repo rate is reduced, banks find it unattractive to deposit funds with the RBI. Together, a cut in both these rates ensures that banks have the necessary funds for liquidity at a lower rate and use the funds for lending to productive sectors in the economy. In such times when businesses are suffering, infusing liquidity in the markets can help keep inflation down.

What is the TLTRO auction? Is it Going to Reduce Inflation Too?

Over the last few weeks, equity, bond, and forex markets have seen a lot of sell-offs. Instruments like corporate bonds, debentures, commercial paper, etc. that were used to access working capital are facing the pressure too. Overall, there is a cash flow pressure on all sectors. By auctioning the TLTROs, the RBI will extend liquidity to banks that they can deploy in commercial papers, investment-grade corporate bonds, and non-convertible debentures. This step by the RBI will help inject liquidity into the markets.

How Does Reducing the Cash Reserve Ratio of Banks Help Me?

All banks have to maintain a cash reserve with the RBI. The amount is calculated as a percentage of the NDTL – Net Demand and Time Liabilities (total deposits: demand deposits + time deposits) of the bank. In today’s announcement, the RBI reduced the CRR from 4% of the NDTL to 3%. This will infuse liquidity of around Rs.1,37,000 crore across the banking system.

What About the MSF? Does That Increase the Liquidity Too?

More than liquidity, it offers a sense of comfort to the banking system by allowing it to avail an additional Rs.1,37,000 crore of liquidity in times of need.

Marginal Standing facility or MSF is a window for banks to borrow funds from the RBI during emergencies when the inter-bank liquidity dries up. The RBI increased the accommodation under MSF from 2% of the Statutory Liquidity Ratio (SLR) to 3%.

These three measures pertaining to TLTRO, CRR, and MSF will inject liquidity of Rs 3.74 lakh crore into the system.

Are There Any More Updates to Come?

The RBI governor mentioned that the Central bank has been closely monitoring and analyzing the situation and will step in whenever required. The governor also assured that it will calibrate its operations to meet any further need for liquidity support as well as to take other imperative measures if warranted.

Disclaimer: The views expressed here are of the author and do not reflect those of Groww.