RBI cut reverse repo rate; focusses on liquidity boost

RBI Governor Shaktikanta Das held a press conference today morning wherein, he laid emphasis on maintaining the financial stability and liquidity in the economy. Meanwhile, Reserve Bank of India (RBI) largely focussed on covering the challenges faced by the banks and NBFCs.

The biggest announcement was made regarding the reverse repo rate which was reduced by 25 basis points. This is the rate at which RBI borrows fund from the commercial banks. In other words, this is the rate at which commercial banks keep their money with RBI usually for a short-term. The cut in this rate should lower the incentives that banks get thereby, encouraging banks in shifting credit offloading to NBFC and other credit seekers in the economy. The governor said that there is a continued inflow via reverse repo window to the central banks, which is in the range of Rs 3 to 4 lakh crore each day, showing liquidity flows available. Hence after this rate cut, he expects that such surplus liquidity can be diverted to the other lending options from the bank.

In another important measure, Governor mentioned that a special aid of Rs 50,000 crore will be provided to the financial institutions such as NABARD, SIDBI and NHB. The above amount would be distributed as Rs 25,000 crore to NABARD, Rs 15,000 crore to SIDBI and Rs 10,000 crore to NHB. The advances for these funds would be charged on policy rate at the time of availment. This would encourage these institutions to lend money at affordable rates.

RBI Governor also said that the IIP data released earlier witnessed that 4.5 per cent growth has not captured the impact caused by COVID-19 so, we should not be misled by the data.

IMF has projected India to post GDP growth of 1.9 per cent in 2020, owing to COVID-19 pandemic that has almost stalled all the economic activities, while it estimates to bounce back the economy in subsequent years with 7.4 per cent GDP growth.