RBI cuts rate by 75 basis points to 4.4% and defers EMI payments

The Reserve Bank of India (RBI) has made announcements to tackle the financial crisis emerging from the spread of COVID-19. After the relaxation in tax and regulatory compliance and economic package announced by the Finance Minister, RBI takes these measures:

1. A moratorium period deferring outstanding EMIs on loans as on 1 March 2020.  The repayment due dates of all outstanding loans (as on 1 March 2020) will stand extended by three months. The duration of the loans also stands extended by three months.
2. Deferment of interest payment by three months on all credit facilities or working capital facilities provided to businesses. The facilities include cash credit/overdraft available to business enterprises as on March 1, 2020. The aggregate interest can be paid after the expiry of the three month period.
3. To make loans cheaper, the repo rate is cut significantly by 0.75%. The new repo rate is 4.4% as against 5.15%. The reverse repo rate is also cut by 0.9%, with the new reverse repo standing at 4%.
4. The RBI Governor predicts a global recession and India should be prepared for it. With a view to releasing more cash into the banking system, the RBI has cut the CRR by 1%. The CRR nows stands at 3%. The CRR cut is estimated to release Rs 1.37 lakh crore into the market.
5. The RBI will also undertake auction of targeted long term repo operations for the three year tenor for an amount of Rs 1 lakh crore at the floating rate.
6. Marginal Standing Facility rate is reduced to 4.65% from 5.4% with immediate effect till June 30. The marginal standing facility enables banks to borrow overnight funds from RBI to enable short-term liquidity with banks.

The above measures are estimated to provide combined liquidity of Rs 3.74 lakh crore in the economy.

Also Read: RBI extends digital payments facilities round the clock

The rate cut and cut in CRR by the RBI will ease the financial concerns of business arising from the lockdown and ensure liquidity. The deferment of repayment of loans and interest for a quarter will provide relief from business lockdown.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in