Implications of Current RBI Credit Policy and Rate Cut

Recent RBI Monetary Policy regarding the rate cut done in its 7the Bi-Monthly Policy held on March 27, 2020. RBI reduce the policy repo rate by 75 bps to 4.40% with immediate effect to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy, while ensuring that inflation remains within the target. The medium-term target for Consumer Price Index (CPI) inflation of 4 % within a band of +/- 2 per cent, while supporting growth.

The key points to be noted are:
  • Cash Reserve Ratio (CRR) reduced by 1% to 3% for a year. With this step Rs. 1.37 Lakh Crores will be injected into the system.
  • Minimum daily CRR maintenance reduced to 80% from 90% earlier. With this step Rs. 3.74 Lakh Crores will be injected into the system.
  • All term loans incl. Corporate Term Loan, Home Loan, or any other retail term loans will get 3 months of moratorium. Means no EMI will be deducted. But if one has chosen the ECS option then it will be debited automatically if one has maintained the bank balance. And if one has not maintained the bank balance then ECS will get bounced and this will not affect one’s CIBIL record.
  • Deferment of Interest on Working Capital Loans for 3 months. Accumulated payment will be done after 3 months.

Here are some points on 'how the RBI's rate cuts impact home loans:
  • The RBI's rate cuts do not necessarily mean that the borrowers benefit immediately. The landing bank has to reduce its Base Lending rate for EMI to decrease.
  • These rate cuts will not have any impact on fixed-rate home loans or fixed rate consumer loans. The rate of interest is fixed to the fixed loans.
  • The existing bank customers (who have taken loans) can see either their Loan tenures or EMIs coming down. By default, the banks reduce the loan tenure instead of loan EMI. That means your monthly EMI instalment amount remains the same. The rate cut will make a substantial difference if the remaining loan term/tenure is very long.
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Some Important Concept from the above readings:
1. What is Repo Rate?
The Repo Rate is the abbreviated term. The full form is “Repurchase Rate”. It is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. Monetary authorities use this to control money supply in the economy, thereby inflation

2. What is Reverse Repo Rate?
It is just opposite of the above point. The full form is “Reverse Repurchase Rate”. It is the rate at which RBI borrows funds from commercial banks. It is the rate at which commercial banks in India park their excess money with RBI usually for the short term. It is also used to control the money supply and inflation.

3. What is CRR?
The full form is “Cash Reserve Ratio”. It is the percentage of total deposits that banks are required to keep in reserves either in the vaults or with RBI so that the same can be given to bank’s customers if the need arises. Banks do not get any interest on this money. It is one of the major weapons in RBI’s arsenal that allows it to maintain a desired level of inflation, control money supply and liquidity in the economy. The lower the CRR, the higher liquidity with banks, which in turn goes into investment and lending and vice-versa.

4. What is SLR?
The full form is “Statutory Liquidity Ratio”. Besides CRR, Banks have to invest a certain percentage of their deposits in specified financial securities like Central Government or State Government securities. This percentage is known as SLR. This money is predominantly invested in government-approved securities (bonds), Gold, which mean the banks can earn some amount as 'interest' on these investments as against CRR where they do not earn anything.

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