RBI’s Liquidity Measures 2.0: Reverse Repo Rate Cut by 25bps & Rs 50,000 cr Lifeline for Small Firms

RBI’s Liquidity Measures 2.0: Reverse Repo Rate Cut by 25bps & Rs 50,000 cr Lifeline for Small Firms

In wake of economic disruptions caused due to COVID19 outbreak, Reserve Bank of India on April 17, 2020 proposed a slew of measures to ensure adequate liquidity in the system and support banks and financial institutions to lend more confidently.

In its second tranche of liquidity relief package for financial institutions battling out economic disruptions owing to COVID19 outbreak the RBI Governor ShaktiKanta shared central bank’s outlook in four key points. He said, today’s announcements are proposed to:

1) Maintain adequate liquidity in the system
2) Facilitate and incentivise bank credit flows
3) Ease out financial stress
4) and, enable formal working of markets

Highlights of RBI’s announcements:

Fixed reverse repo rate cut by 25 BPS

Following an historic rate cut in benchmark lending rate by 75 bps on March 27, the RBI announced a steep cut of reverse repo rate by 25 basis points to 3.75%. Reverse repo rate is the rate at RBI borrows money from banks. The central bank further said, inflation will settle below target of 4 percent for FY 20-21.

In a move to ease liquidity crunch of banks and financial institutions the central bank has allowed banks to not make any dividend payments to the shareholders. The decision is taken on the backdrop of financial challenges faced by banks & financial institutions during the Covid-19 pandemic.

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50,000 crore for small & mid-sized firms

The RBI Governor announced second leg of Targeted Long-Term Repo Operations (TLTRO 2.0) worth Rs 50,000 crore for extending liquidity in NBFCs and micro-financial institutions (MFIs). He added this amount can be expanded in future basis the requirement.

He also added that the TLTRO 2.0 should be invested in investment-grade bonds companies and at least 50% of these funds should be moved toward smaller NBFCs and MFIs. Furthermore, the RBI Governor announced a refinancing package of up to Rs 50,000 crore for All India Financial Institutions (AIFIs) like Nabard, SIDBI and NHB.

Moratorium period excluded from NPA classification

In one of the big steps to ease the financial worries in regards to deterioration of assets’ classification, the RBI batted for relaxation in NPA determination norms. Mr Das said that the 90-day NPA classification period will be exclusive of Covid19 Moratorium facility.

States borrowing limit increased to 60%

The RBI has further increased WMA (Ways and Means Advances) limit for Governments of State and Union Territories by 30%; taking the WMA limit to 60%. The extension is offered till September 30, 2020. The exporters are also granted a six month extension to realise their export proceeds.

Outlook

The RBI suggested lower inflation forecast for the financial year despite the covid 19 outbreak. The RBI highlighted that despite the gloomy global financial picture, India is among handful of countries to project positive growth at 1.9 percent. He reiterated that we have surplus Forex reserves for 11.8 months of imports at $476.5 billion.

With today’s announcement, RBI’s liquidity injection since 6 February 2020 stands at 3.2 percent of GDP said the RBI Governor. On March 27, 2020, RBI had announced Rs 3.74 lakh liquidity boost, including TLTRO 1.0 window of Rs one lakh crore for banks, 75 basis repo rate cut, 90 bps reverse repo cut and CRR cut by 1%. All these announcements were made along with a guideline for banks to extend a 90 day moratorium on retail loans and working capital loans till May 31. However, many NBFCs were struggling to meet the obligation.

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