The RBI, in its latest Annual Monetary Policy report noted that significant monetary and liquidity measures taken by the Reserve Bank and fiscal measures by the government would mitigate the adverse impact on domestic demand and help spur economic activity once normalcy is restored. The RBI monetary policy committee (MPC) met four times during October 2019-March 2020. In its October 2019 meeting, the MPC had noted that the continuing slowdown warranted intensified efforts to restore the growth momentum. With inflation expected to remain below target in the remaining period of 2019-20 and Q1:2020-21, the MPC voted to reduce the policy repo rate by 25 basis points (bps) to 5.15 per cent and committed to continue with an accommodative stance as long as necessary to revive growth, while ensuring that inflation remained within the target. The MPC decided to hold the policy rate unchanged in its December 2019 and February 2020 meetings. In its off-cycle meeting in March, the MPC noted that macroeconomic risks brought on by the pandemic could be severe, both on the demand and supply sides, and stressed upon the need to do whatever is necessary to shield the domestic economy from the pandemic. The MPC reduced the policy repo rate by 75 bps to 4.4 per cent.
During February-March 2020, the Reserve Bank of India (RBI) also undertook several measures to further improve liquidity, monetary transmission and credit flows to the economy, and provide relief on debt servicing. Among the measures, the RBI is conducting auctions of targeted long-term repos of up to three years tenor of appropriate sizes for a total amount of up to ₹1,00,000 crore at a floating rate linked to the policy repo rate. The CRR requirement of banks was reduced by 100 bps from 4.0 per cent of NDTL to 3.0 percent effective fortnight beginning March 28, 2020, which would augment primary liquidity in the banking system by about ₹1,37,000 crore. This dispensation will be available for a period of one year ending March 26, 2021.The minimum daily CRR balance requirement was reduced from 90 per cent to 80 per cent effective from the first day of the fortnight beginning March 28, 2020. This dispensation will be available up to June 26, 2020.
In view of the exceptionally high volatility in domestic financial markets and to provide comfort to the banking system, banks' limit for borrowing overnight under the MSF by dipping into their Statutory Liquidity Ratio (SLR) were raised to 3 per cent of NDTL from 2 per cent. This measure will allow the banking system to avail an additional ₹1,37,000 crore of liquidity under the liquidity adjustment facility (LAF) window at the reduced MSF rate of 4.65 per cent and will be applicable up to June 30, 2020.
The policy repo rate under the LAF was reduced by 75 basis points to 4.40 per cent from 5.15 per cent with immediate effect. Accordingly, the MSF rate and the Bank Rate were reduced to 4.65 per cent from 5.40 per cent. In view of persistent excess liquidity, the existing LAF corridor was widened asymmetrically to 65 bps from 50 bps. Accordingly, the reverse repo rate was reduced by 90 bps from 4.90 per cent to 4.00 per cent. The purpose of this measure was to make it relatively unattractive for banks to passively deposit funds with the RBI; instead, these funds should be deployed for on-lending to productive sectors of the economy. Thus, the reverse repo rate is now 40 bps lower than the policy repo rate while the MSF rate continues to be 25 bps above the policy repo rate.
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