To Ensure Liquidity During COVID-19 Lockdown, RBI Reduces Reverse Repo Rate to 3.75%

As the country fights against the Coronavirus (COVID-19) outbreak by staying home, the Reserve Bank of India (RBI) has announced the second round of monetary measures to help boost the economy which has come to a standstill during the lockdown.

Reverse repo rate is the rate at which the RBI borrows money from commercial banks, an economic measure used to control the money supply in the country.

The RBI has proposed additional measures to maintain adequate liquidity in the face of the pandemic on three main grounds:

  • To facilitate and incentivize the bank credit flows
  • To ease the financial stress
  • To enable normal functioning of markets

The RBI governor Shaktikanta Das said that the fixed reverse repo rate under the liquidity adjustment facility (LAF) has been reduced by 25 basis points (bps) from 4% to 3.75% with immediate effect. However, the policy repo rate remains unchanged at 4.40%, and the marginal standing facility rate and the bank rate remain unchanged at 4.65%. LAF is used to help banks adjust the mismatches in liquidity by enabling them to quickly borrow money in case of any emergency.


On March 27, 2020, when the RBI governor held his first press meet amid COVID-19 outbreak and nationwide lockdown, India’s central bank, which controls the issue and supply of the Indian rupee, had announced that the repo rate would be reduced by 75 bps to 4.4%, previously reported by Mercom. Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds.

The RBI has also decided to undertake Targeted Long-Term Repo Operations (TLTRO) 2.0 with ₹500 billion ($6.56 billion) to begin with.

Given the tightening of economic conditions in the wake of the COVID-19 pandemic, financial institutions are facing difficulties in raising resources from the market.

Addressing the media today, Das said, “It has been decided to provide special refinance for an amount of ₹500 billion ($6.56 billion) to the National Bank for Agriculture & Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and National Housing Bank to enable them to meet sectoral credit needs.”

The RBI has also announced an assistance of ₹150 billion (~$1.964 billion) to refinance small firms.

“This may be stepped up as necessary. Emphasis is on ensuring adequate funds flow to non-banking financial companies (NBFCs) and microfinance institutions (MFIs),” the RBI governor said.

Briefing the media on relief and recovery roadmap amid the COVID-19 outbreak, he added that the RBI has decided that scheduled commercial banks and cooperative banks will not make any dividend payout for the financial year (FY) 2020.

On April 14, 2020, the International Monetary Fund (IMF) released its global growth projections, revealing that in 2020, the global economy is expected to plunge into the worst recession since the Great Depression, far worse than the global financial crisis.

“India is among the handful of countries that are projected to cling on tenuously to positive growth at 1.9%. This is the highest growth rate among the G20 economies,” Das added.

Briefly, he also shed light on the electricity generation which has undergone a sharp fall in daily demand in the range of 25-30% after the announcement of the nationwide lockdown on March 25, 2020.

The RBI also noted that there had been a contraction in exports in March 2020 at (-) 34.6% which has turned out to be much more severe than during the global financial crisis.

According to the RBI governor, “Barring iron ore, all exporting sectors showed a decline in outbound shipments. Merchandise imports also fell by 28.7% in March 2020 across the board, barring transport equipment.”

Automobile production and sales, and port freight traffic declined sharply in March, Das noted. The manufacturing purchasing managers’ index (PMI) for March 2020, was also the lowest in the last four months. “Notably, suppliers’ delivery time lengthened for the first time in five months, indicating supply disruptions,” the RBI governor added.

PMI is an indicator of the health of the manufacturing sector,  which is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the job environment. An index value above 50% signifies a positive development in the industrial sector, whereas a value below 50% indicates a negative scenario.

He also said that the services PMI declined into contraction in March 2020, pulled down by a sharp downturn in export business, new domestic orders, and employment.

Mercom has previously reported on how the ongoing pandemic is affecting the global supply chain for solar projects. Previously, the Ministry of New and Renewable Energy (MNRE) also issued an official memorandum which stated that the time extension in scheduled commissioning of renewable projects due to the disruption of supply chains will be treated as a ‘force majeure’ event. A force majeure (FM) clause means that if there are extraordinary events like those beyond human control such as wars, riots, crimes, or natural calamities, then this clause can free both the parties from contractual liability from fulfilling their obligations under the contract.

Asset classification

On March 27, 2020, the RBI had permitted lending institutions to grant a moratorium of three months on the payment of current dues falling between March 1 and May 31, 2020.

Das added that it has been decided that in respect of all accounts for which lending institutions decide to grant moratorium (or deferment), and which were standard as on March 1, 2020, the 90-day NPA (non-performing assets) norm will exclude the moratorium period. So, this means that there would be an asset classification standstill for all such accounts from March 1, 2020, to May 31, 2020. NBFCs have the flexibility under the prescribed accounting standards to consider such relief to their borrowers He further added that the banks have to maintain a higher provision of 10% on all such accounts under standstill, spread over two quarters—March 2020 and June 2020.

Liquidity Coverage Ratio (LCR)

To ease the liquidity position at the level of individual institutions, the LCR requirement for Scheduled Commercial Banks is being brought down from 100% to 80% with immediate effect. The requirement will be gradually restored in two phases – 90% by October 1, 2020, and 100% by April 1, 2021.

In conclusion, Das said, “The RBI will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic. The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable.”

Earlier, India’s Finance Minister Nirmala Sitharaman had announced relief measures for taxpayers and businesses amid the pandemic outbreak.

Mercom has been tracking all government initiatives and announcements regarding the ongoing pandemic and analyzing its impact on the Indian renewable industry. You can stay up-to-date with all COVID-19 related updates here.

 

Image credit: PIB