RBI to infuse ₹3.7 trillion in financial system to boost liquidity
2 min read 27 Mar 2020, 11:22 AM ISTRBI announced reduction of cash reserve ratio for all banks by 100 basis points to 3.0%RBI will conduct auctions of targeted term repos of up to three years tenor of appropriate sizes
PremiumThe Reserve Bank of India (RBI) on Friday went all out to make ample liquidity available in the market and nudge banks to lend to the productive sectors of the economy, announcing measures to inject ₹3.74 trillion.
These measures pertain to 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 that both the CRR cut and the easing of MSF borrowing requirements will lead to a ₹1.37 trillion liquidity infusion each. The central bank also reduced the reverse repo rate by 90 bps 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 that during the month of March so far, banks have been parking close to ₹3 trillion on a daily average basis under the reverse repo, even as the growth of bank credit has been steadily slowing down.
RBI data showed that non-food credit stood at ₹100.8 trillion, showing a growth 6.07% year-on-year (y-o-y) for the fortnight ended 13 March.
The cash reserve ratio or CRR is the amount of money banks need to set aside with RBI as buffer and do not earn any interest on it. The last CRR cut was in February 2013 when it was reduced by 25 basis points (bps) to 4% and has been so for the last seven years.
Under the marginal standing facility (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," said RBI.
Das said on Friday that 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," said Das.
Bankers were jubilant as RBI has lowered CRR after several years allowing them more funds to lend, if they are willing to. Asked if it is a demand problem despite banks sitting on extra cash, Rajnish Kumar, chairman of State Bank of India (SBI) said that there is working capital demand from customers. Interestingly, SBI was the first bank to sanction a credit line to existing borrowers after which several other public sector banks followed 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 top priority of the central bank.
“Measures like slashing of reverse repo rate by 90 bps to 4%, CRR by 100 bps for a period of one year will ensure sufficient liquidity in the system at a time of pandemic crisis," said Chunduru.
