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RBI’s COVID-19 Economic Relief Package

Topics Covered: Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes; mechanisms, laws, institutions and bodies constituted for the protection and betterment of these vulnerable sections.

RBI’s COVID-19 Economic Relief Package

What to study?

For Prelims: Key terms mentioned, key changes made.

For Mains: Significance and the need for these measures.

Context: Reserve Bank of India’s Monetary Policy Committee (MPC) has come out with its own measures to help deal with economic fall out of COVID-19 pandemic.

This was the first time that the MPC met outside its bi-monthly meeting calendar.

Four steps taken by the RBI:

  1. Increase the liquidity in the system.
  2. Make sure the lower policy rate is transmitted. Steps one and two are linked.
  3. Give a three-month window for a payback on all term loans.
  4. Take steps to reduce volatility and provide stability.

Measures announced and their impact:

  1. Cut in repo rate:

A big cut in the repo rate by 75 basis points (100 basis points make a per cent, so three-quarters of a percentage point) to 4.4%.

A low repo rate has the overall effect of reducing interest rates for the system. Lower rates make it easier for entrepreneurs to take loans for working capital and for households for homes, vehicles and so on.

  1. Cut in reverse repo rate:

The ratio has been cut by 90 bps to 4%.

This is the rate at which banks lend to the RBI.

A reduction of the reverse repo to 4% makes it unattractive to banks to park it with the RBI and banks will be nudged to lend.

  1. Moratorium on Repayments of Loans:

RBI has also allowed banks to defer payment of Equated Monthly Instalments (EMIs) on home, car, personal loans as well as credit card dues for three months till May 31.

The RBI also allowed lending institutions, banks to defer interest on working capital repayments by 3 months — a move aimed at addressing the distress among firms as production is down.

For banks and lending institutions, this will affect their cash flows as they may not be getting repayments for three months. But the RBI has reduced their cash reserve ratio (CRR) requirements, providing them additional liquidity.

  1. Cut in Cash Reserve Ratio (CRR):

The RBI reduced the cash reserve ratio (CRR) by a full percentage point down to 3% for a year. The CRR is the percentage of demand and time deposits banks have to keep with the RBI.

RBI has reduced the CRR to 3%, freeing up ₹1.37 trillion for banks to lend. CRR has been chosen rather than SLR because this increases ‘primary liquidity’ with the banks a bit better.

  1. Targeted long-term repo operations:

RBI will lend money to banks (a total of ₹1 trillion) that can be invested in bonds and other forms of lending instruments.

TLTRO will provide financing to credit institutions.

  1. Marginal standing facility (MSF):

₹1.37 trillion will be made available under the emergency lending window called the marginal standing facility (MSF).

Banks will now be able to borrow 3% of their deposits under this window, up from the current 2%. Basically, RBI is willing to lend more than before.

Sources: pib.