RBI cuts repo rate to ease liquidity conditions

Reserve Bank of India (RBI) Governor Shaktikanta Das announced a slew of measures, including 40 basis points (NPA) cut in repo and reverse repo rate, extending three month moratorium period on term loan instalments, converting interest into term loan, etc aimed at further easing the liquidity conditions and providing relief to borrowers.
The RBI’s rate setting Monetary Policy Committee (MPC), unexpectedly cut the repo rate by 40 basis points to 4% and the reverse repo rate to 3.35%.

The move will make funds cheaper for banks thus aiding them to bring down lending rates. This comes at a time when credit offtake is sluggish and investments have halted in the economy. EMIs on home, auto, personal and term loan rates are expected to come down in the coming days.

The move to extend moratorium on term loan will come in handy for borrowers. The measure will help borrowers, especially corporates which have halted production and are facing cash flow problems, to get more time to stabilize their operations and restart their units.
All borrowers, including home loan, term loans and credit card outstandings, will get the benefit of the moratorium.

In another significant measure, the RBI has allowed borrowers and banks to convert the interest charges during the moratorium period (from March 1 to August 31) into a term loan which can be repaid by March 2021. This is expected to reduce the burden on borrowers who have gone for moratorium.
Interestingly, the surprised announcement has come just a few days after the government concluded unveiling its five tranches of Rs 20 lakh crore worth of stimulus.

Both, the government and RBI are moving in tandem to battle the exigency created by the Coronavirus outbreak.
The RBI was expected to follow up with monetary-side interventions after the government announced fiscal measures to cushion the economy from the Covid impact.
The RBI Governor came out for the third time with a set of measures to alleviate distress in the economy.

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