RBI announces major cut in interest rates

Mumbai: – The Reserve Bank of India (RBI) made some important announcements on Friday, given the effects of the Coronavirus pandemic, on the Indian economy. RBI reduced the REPO rate by 0.75% and the reverse REPO rate by 0.90%. This will reduce the EMIs for car and home loans, bringing major relief to the borrowers. RBI also advised the banks to allow a moratorium for three months, to the borrowers. The markets have welcomed the announcements made by the RBI and the announcement increased the liquidity by ₹ 3.74 trillion.

The lockdown and other measures initiated by the government are having a detrimental effect on the Indian economy. Against this background, the demand was gaining ground that the RBI should bring relief to the common customer, industry and the markets, by reducing interest rates. A moratorium for three months, on the borrowings, was also being demanded.

Reflection of these demands is seen in the decisions announced by RBI on Friday. The bimonthly Credit Policy Assessment meeting of the RBI was held a few days ago, against the background of the lockdown. As expected, the RBI announced these big decisions after the meeting. RBI reduced the REPO rate by 0.75% and the reverse REPO rate by 0.90%. REPO rate is the interest rate on the borrowings by the banks from the RBI. These are the funds used by the banks for lending to the customers. Whereas, Reverse REPO rate is the interest rate paid by the RBI on the funds parked by the banks with the RBI. With the cuts announced on Friday, the REPO rate has come down to 4.4% from 5.15% and Reverse Repo Rate has come down to 4% from 4.9%.

The banks are expected to pass on the benefit of the reduced rates to their customers. If the banks decide to reduce the interest rates, vehicle and home loan will become cheaper.

RBI also reduced the Cash Reserve Ratio (CRR) rates by 1%. The banks must keep a certain proportion of their deposits in cash. This is the CRR rate. With reduction in this rate, additional liquidity of ₹1.37 trillion will become available to the banks. The RBI decision will increase cash availability in the markets. It will be beneficial for the economy if there is more cash availability in the financial markets.

RBI has permitted the banks to grant three months extension to the borrowers’ repayment terms. Commercial banks, cooperative banks, Non-banking financial institutions and rural banks will make this opportunity available to the borrowers. RBI clarified that to do this, the banks will have to reschedule the loan repayment tenures. It is hoped that the customers will directly benefit, if the banks implement this. Industrial as well as ordinary customers, have welcomed the RBI decisions.

Meanwhile, RBI Governor, Shaktikant Das, expressed fears that the world is going to land in a major recession because of the Coronavirus pandemic. Governor Shaktikant Das warned that the financial turnover around the globe has been stalled, because of the pandemic and a major part of the world will be sucked into a recession.

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