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RBI reverse Repo rate cut: effects on the enocomy explained

  • FINANCE
  • Jayant gattani | Updated: April 21, 2020, 10:48 a.m.




This cut was done with a view of expanding liquidity to the economy and allow the banks to lend more money to the people. Now, if any account has opted for the moratorium facility then the period of moratorium will be excluded from the 90 days NPA classification norm.


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Amid the ongoing COVID-19 pandemic, the government and Reserve Bank of India are trying hard to revive the sentiments of the economy and people by announcing various stimulus packages and relaxing policies. After the recent MPC meeting the RBI governor had announced repo rate at 4.40% and reverse repo rate at 4.00%. Repo rate is the rate at which the RBI lends money to banks, reverse repo rate is the rate at which RBI accepts money from the banks.

But on Friday, the RBI governor, in a press release, has announced that a further 0.25% cut in the reverse repo rate along with other policy changes. This cut was done with a view of expanding liquidity to the economy and allow the banks to lend more money to the people.

As we all know that the lockdown has hit economy and pockets of everyone. There are chances that most of the borrowers will default in their EMIs and thus there will be surge in the NPAs. Also, when the lockdown will end, the economic activities will take some time to get back to the pre lockdown levels which will also have a negative impact on the cash flows in the economy. Thus, businesses and people in general will go to banks and ask for liquidity. In order to avoid the uncertain times and cash flow outlook banks can decide not to lend money and decide to keep it with the RBI at 4.00%. Now if there is a cut in the reverse repo rate, then banks can decide to lend to the public instead of going for keeping the money with the RBI due to lack of the attractive rate of interest provided by the RBI.

The RBI governor has also announced a targeted long-term repo operations (TLTRO) of Rs. 50,000 crores that will be for NBFCs.

Along with this the RBI has announced relaxation in the asset classification for banks. Now, if any account has opted for the moratorium facility then the period of moratorium will be excluded from the 90 days NPA classification norm.

The liquidity coverage ratio has also been brought down to 80%. This was 100% before the announcement. The banks are also said to not make any dividend payments until further orders by the RBI.

The governor has also said that they will continuously monitor the situation and come out with the measures to solve all the challenges faced by the economy.

Jayant Gattani is an established Chartered accountant and has given various views on ongoing economical and financial situation in the country.

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