RBI Cuts Repo Rate To 4%, Extends EMI Moratorium Amid Corona Pandemic

Amid looming threats of an economic contraction in India for the first time in over four decades, owing to the Coronavirus pandemic, the Reserve Bank of India (RBI) in an unscheduled announcement on May 22, 2020, lowered its interest rate to an all-time low of 4%, through a 40-basis-point reduction.

The reduction would result in, among other things, existing home loan EMIs going significantly low since banks have linked their home loans with the repo rate starting October 2019.

Consequently, the reverse repo rate now stands at 3.35% as against 3.75% earlier. The RBI has already lowered the cash reserve ratio to 3%, to infuse more liquidity into the system.

The reverse repo rate is the rate at which the RBI borrows money from banks. Cash reserve ratio is the percentage of total deposits that banks must keep in their reserves, on which they earn no interest. Depending on the situation, this money is infused into the system to improve liquidity.

After its inception in India in 2000, the repo rate was previously lowered to its lowest level of 4.74% in April 2009, in the wake of the global slowdown.

The measures by the RBI Monetary Policy Committee (MPC), which met ahead of its scheduled meeting in early June, are meant to lend support to the economy, which, experts believe, might suffer tremendous loss because of a prolonged lockdown to contain the spread of the COVID-19 - as on May 22, 2020, India had over 1.18 lakh cases.

In a similar unscheduled announcement on March 28, the banking regulator had brought down the repo rate, at which it lends to scheduled banks in India, by 75 basis points, amid a nationwide lockdown in the aftermath of Coronavirus outbreak.  Further policy easing is on the cards as the six-member monetary policy committee maintained its 'accommodative' stance.

EMI Moratorium extension

In major relief for those servicing an EMI, the apex bank has also extended by three months a moratorium it announced in March.  The RBI, in March 2020, imposed a moratorium on principal and interest payments for three months on term loans, directing banks that non-payment should not be considered as a 'non-performing asset'. This period has now been extended till August 31, 2020.

The move will not only help homebuyers but also slowdown and liquidity-starved builders.

Data available with PropTiger.com show that the real estate developers were sitting on an inventory stock worth over Rs 6 lakh crore in nine key markets, at a time when the builders in the country are under tremendous pressure owing to a liquidity crunch. In fact, during the festive season, which is covered in Q3 FY20, sales in India’s nine markets fell by 30 per cent year-on-year.

“The RBI measures will help in managing supply-side bottlenecks by providing better and easier credits to the developers. Likewise, it will boost demand in the form of cheaper home loans. The timing is also apt as everywhere we can see the partial suspension of the lockdown and things are gradually coming back to normal. In such circumstances, a positive step like this can give further confidence and foster faster revival,” says Ankit Kansal, MD & CEO, 360 Realtors.

Economic support

Earlier, the RBI had also announced liquidity infusion of Rs 3.74 trillion in the banking system, increasing the total to a record high of Rs 6.5 trillion in the aftermath of the pandemic.

The central bank expects the economy to contract in FY21 as the impact of the Coronavirus and the subsequent lockdown have brought domestic activity to a grinding halt. While various rating agencies have predicted contraction, Goldman Sachs forecasts India’s GDP growth will fall to -3.6 per cent in 2020 with further downside risks.

“The RBI will continue to remain vigilant and in battle readiness to use all its instruments and even fashion new ones, as recent experience has demonstrated, to address dynamics of the unknown future,” RBI governor Shaktikant Das said while addressing a press conference on May 22, 2020.