Reverse Repo Rate Current Affairs - 2020

Monetary Policy Committee meets: Repo rate reduces to 4%

On May 22, 2020, the policy committee met in an emergency meeting to review the current economic outlook and impacts of COVID-19.

Highlights

The RBI has reduced the repo rate from 4.4% to 4%. It has reduced the reverse repo rate to 3.35%. The RBI also announced that the reduction in policy rate is to be provided as long as the economic growth in the country is to be mitigated.

Current Economic Scenario

The global trade is declining and the world is heading towards recession. The Indian Economic growth is also slowing down to a great extent in spite of GoI trying to infuse liquidity in to the market. The top six industrialized states that account to 60% of industrial production in the country now falls in red zone. This will affect India’s growth further as economic activities in red zones are not being operationalized to its fullest.

Challenges

The rural and urban demand has been falling down. The manufacturing activity in the country has fallen down by 21% post COVID-19. Also, the output from core industries has fell by 6.5%.

Measures of RBI

RBI has announced 4 major economic measures to boost the economy. This includes measures to improve functioning of markets, measures to ease financial stress, measures to support exports and imports and measures to ease financial constraints faced by the state governments.

The measures are as follows

  • RBI will provide another 90-day extension to offer loan facilities.
  • Rs 15,000 crore line of credit allocated to EXIM banks
  • RBI has increased export credit period from 12 months to 15 months.
  • The term loan moratium has been extended till August 31.
  • The group exposure limit of the banks has increased from 25% to 30%.
  • The rules of Consolidated Sinking Funds have been relaxed. This will enable states to meet 45% of redemption of their market borrowing.

RBI cuts Reverse Repo rate to 3.75%, Rs 50,000 crores for LTRO 2.0

On April 17, 2020, the Reserve Bank of India announced a slew of measures after GoI extended the lock down till May 3, 3030. The Apex bank cut the reverse repo rate to 3.75%. It cut the repo rate to 4.4% from 5.15%. Also, the central bank has announced Rs 50,000 crore for Long Term Repo Operation (LTRO).

Highlights

RBI has eased the Liquidity Coverage Ratio from 100% to 80%. The LCR is the assets held by the banks to make sure its ongoing ability to meet short-term obligations are fulfilled.

The RBI will also provide Rs 50,000 crore special finance assistance to institutions such as SIDBI, NABARD, NHB. This is being done as these institutions are not able to raise fresh resources from the market due to the lock down.

LTRO 2.0

This time the LTRO has been named LTRO 2.0 because, this time the LTRO is to focus on liquidity needs of microfinances and NBFC. Earlier the LTRO went largely to the public sector undertakings and larger corporations.