The Reserve Bank of India (RBI) on Friday went all out to make ample liquidity available in the market and nudge banks to aid the productive sectors of the economy, announcing measures to inject ₹3.74 trillion.
The measures include targeted long-term repo operations (TLTRO) of up to ₹1 trillion, a 100-basis point (bps) cut in cash-reserve ratio (CRR) and easier borrowing requirements under the marginal standing facility (MSF) window. RBI said the CRR cut and easier MSF rules will infuse ₹1.37 trillion each. The central bank also reduced the reverse repo rate by 90bps to 4%, making it less attractive for banks to simply park money with the RBI instead of lending.
RBI governor Shaktikanta Das said in a statement that so far in March, banks have been parking close to ₹3 trillion on a daily average basis under the reverse repo, even as their credit growth slowed. RBI data showed that non-food credit stood at ₹100.8 trillion, growing 6.07% year-on-year (y-o-y) for the fortnight ended 13 March.
The CRR is the amount banks need to park with the RBI, on which they earn no interest. CRR had remained at 4% for the last seven years since February 2013, when it was cut by 25bps.
Under the MSF window, banks can borrow overnight by dipping up to 2% into the statutory liquidity ratio (SLR). The central bank said on Friday that owing to the exceptionally high volatility in domestic financial markets, banks have been allowed to dip 3% into SLR for borrowings under MSF.
“The onset and rapid propagation of Covid-19 in India has ignited large sell-offs in the domestic equity, bond and forex markets. With the intensification of redemption pressures, liquidity premia on instruments, such as corporate bonds, commercial paper and debentures, have surged," it added.
Das said the country is living through an extraordinary and unprecedented situation, and everything hinges on the depth of the Covid-19 outbreak, its spread and its duration. “Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode."
Bankers were jubilant over the CRR cut, which came after a long period, allowing them to have more funds to lend, if they were willing to. Asked if it was a demand problem despite banks sitting on extra cash, Rajnish Kumar, chairman, State Bank of India (SBI) said there is working capital demand from customers. Interestingly, SBI was the first to sanction a credit line to existing borrowers, prompting several other public sector banks to follow suit.
According to Padmaja Chunduru, chief executive, Indian Bank, the governor has rightly pointed out that given the uncertain economic outlook globally, rather negative, financial stability is the need of the hour and the top priority of the central bank. “Measures like slashing of reverse repo rate by 90bps to 4%, CRR by 100bps for a period of one year, will ensure sufficient liquidity in the system at the time of the pandemic crisis."