Coronavirus effect: RBI cuts reverse repo rate by 25 bps to 3.75%, maintains status quo on repo rate

In a surprising move, the Reserve Bank of India (RBI) on April 17 cut the reverse repo rate by 25 basis points (bps) to 3.75 per cent versus 4 per cent earlier, as the central bank ramped up measures to relieve pressure on an economy ravaged by the coronavirus pandemic. In the last meeting on March 27, the RBI had announced a massive 90 bps cut in reverse repo rate, the rate at which the RBI borrows money from banks by lending securities, to ensure surplus liquidity in the system.

The central bank, however, kept all key rate, including repo rate, unchanged.

"On April 15, Rs 6.91 crore surplus was in the system. To allow banks to use this surplus into economy, reverse repo rate is being reduced by 25 bps from 4 per cent to 3.75 per cent under Liquidity adjustment facility (LAF)," said RBI Governor Shaktikanta Das while addressing the media on Friday.

The policy measures taken by the RBI will sizeably expand liquidity in the system, which will ensure that financial markets and institutions are able to function normally in the face of COVID-19 related dislocations. This will also reinforce monetary transmission so that bank credit flows on easier terms are sustained to all those who have been affected.

In the last policy meeting on March 27, the central bank had announced a 75 basis points cut in repo rate coupled to reduce financial stress on banks and encourage them to lend more money to businesses. The cash reserve ratio (CRR) of all banks was also reduced by 100 bps to 3 per cent of net demand and time liabilities (NDTL) with effect from fortnight beginning March 28, 2020 for a period of one year.

Amid COVID-19 outbreak, financial markets have become highly volatile resulting in panic sell-offs and wealth destruction in Indian equity markets, in line with global peers. The RBI and the central government are in war mode, responding to the situation with several conventional and unconventional measures targeted at easing financial conditions to avoid a demand collapse and to prevent financial markets from freezing up due to illiquidity.

By Chitranjan Kumar