Coronavirus: RBI makes future loans cheaper, chalks out strategy to maintain liquidity

The RBI Friday committed to infuse Rs 3.74 lakh crore into the financial system to help the economy face the COVID-19 onslaught, gave a respite to individuals and companies from repayment of loans and reduced key policy interest rates to make bank loans cheaper.

In a big relief to individuals, whose repayment of home, auto or personal loans may have got impacted by the economic destruction caused by COVID-19, the Reserve Bank of India Friday asked all commercial banks to defer the repayment of principal or interest on all such retail loans by the next three months to June 30.

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Similarly, the companies, who have taken loans from the banks, will not have to repay either the interest or the principal till the moratorium period is lifted.

The move is expected to give relief to a large chunk of self-employed people as well as the smaller businesses, whose incomes may have come to a standstill at the time of a three-week lockdown imposed on the country to fight the coronavirus impact.

However, the moratorium will not apply to credit card dues, which do not fall under the category of term loans.

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It cut the key policy repo rate by a deep 75 basis points, bringing it down to 4.4%, the lowest ever in India’s history, to make new loans cheap for all kinds of borrowers.

The RBI also reduced the Cash Reserve Ratio of all banks by a 100 bps to 3%, meaning the banks will not be required to park a large part of their money mandatorily with RBI and therefore, they will have to lend to businesses and individuals.

The CRR cut is expected to release Rs 1.37 lakh crore to the commercial banks, which in turn can lend to the sectors in need. The central bank also reduced the reverse repo rate by 90 bps.

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The last time repo rate was cut to the lowest level was in 2009 after the global financial crisis, when it was brought down to 4.74%.

However, the benefit of reduction in interest rates will be felt only after the lockdown is lifted after the 21-day period and business activities begin. But the move will assuage the financial markets during the uncertain times.

“The global slowdown can weaken with an adverse impact on the country. The RBI has all – conventional and unconventional – instruments on the table to support financial stability. Tough times do not last long,” RBI Governor Shaktikanta Das said after releasing a set of emergency measures to counter the COVID-19 fallout.

“In many ways the RBI’s measures went beyond the market’s expectation, particularly the magnitude of the policy rate cut and the CRR reduction,” Abheek Barua, Chief Economist of HDFC Bank said.

The move comes a day after the Centre released Rs 1.70 lakh crore of welfare funds for poor and middle income groups to combat the impact of COVID-19 outbreak.

Sources said the government is now preparing to announce a stimulus package for businesses through measures such as tax holidays for companies.