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DH Analysis: RBI's 75 bps rate cut ineffective for now

Within 20 days, the central bank rushes to cut reverse repo rate
Last Updated 17 April 2020, 11:14 IST

The 75 basis points cut in the repo rate by the Reserve Bank of India (RBI) on March 27, seems to have failed in achieving the desired goal -- pushing more credit at affordable rates into the economy. This has forced the central bank to further cut the reverse repo rate by another 25 basis points on Friday.

The repo operations of the RBI over the past 11 trading sessions reveal that the idle surplus funds with the Indian banks have almost doubled since the RBI announced a massive rate cut--surging by 80%. The liquidity surplus in the banking system on Thursday stood at Rs 6.99 lakh crore, up massively from Rs 3.89 lakh crore on March 26 -- a day prior to the RBI's emergency rate cut.

Experts across the platform say that even as banks are willing to lend due to their liquidity position right now, but there are no takers for the loan. "Your borrowing appetite depends on how secure your future finances are. With economic uncertainty over the head and hardly any economic activity taking place, neither corporations nor individuals are willing to risk the debt," an economist working with one of the banks told DH, wishing anonymity.

Consider this: During the holiday truncated week ended April 10, 2020, the banking system witnessed a notable surge in liquidity compared to a week ago. The outstanding liquidity surplus in the banking system was above Rs 4.5 lakh crore throughout the week during April 6-9, which was widened by almost Rs 2.29 lakh crore from the end of the previous month.

Source: RBI, CARE Ratings
Source: RBI, CARE Ratings

Usually, in a holiday season, there are huge withdrawals and an uptick in the personal loans as consumers go on a spending spree. However, with 1.3 billion people of the country placed under lockdown and hanging uncertainty over their economic future, there was no such uptick in consumption this time around.

That is why the RBI governor minced no words in saying that the central bank wanted banks to lend more by cutting the reverse repo rate. In a video presser he said: "In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed-rate reverse repo rate under the liquidity adjustment facility (LAF)."

The central bank has slashed the reverse repo rate -- the rate at which commercial banks in India park their excess money with Reserve Bank of India usually for a short-term -- by 25 basis points from 4% to 3.75% with immediate effect.

However, the policy repo rate remains unchanged at 4.40%, and the marginal standing facility (MSF) rate and the Bank Rate remain unchanged at 4.65%. Analysts say that the move is expected to further dent the profitability of the banks, which are already facing headwinds due to COVID-19.

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(Published 17 April 2020, 08:30 IST)

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