Repo rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate decreases, borrowing from RBI becomes cheaper.
After the rate cut, EMIs on home loans and other loans will come down significantly. Reverse repo rate is 25 bps lower than the Repo Rate.
“While this decision may be on expected lines and perhaps widely discounted, it is important not to discount the Reserve Bank of India. It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges that the Indian economy currently faces in terms of the sluggishness of the growth momentum.”
STEALTH RATE CUT
• Reverse repo rate is the rate at which banks deposit to RBI and earn interest.
• But this used to be an overnight rate.
• But now the RBI will now be conducting it over a 14-day period.
LONG TERM REPOS
• RBI will conduct 1-year and 3-year repos up to an amount of Rs 1 lakh crore.
• Through this bank can take money from RBI at an interest rate of 5.15% (which is the repo rate) and use it for lending onwards.
• It has to return this money only after 1-year or 3-year as the case may be.
IMPACT OF LONG TERM REPOS
• Till now, Banks used to take deposits from customers at higher rates.
• Also the money borrowed from RBI was very little.
• But now since RBI is willing to provide Rs 1 lakh crore to the banking system at 5.15%, there is no reason why a bank cannot borrow from the RBI at this rate and lend onwards to the final consumers.
RELAXATION IN CRR
Any incremental lending (retail loans) by banks for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) to automobile,
Between January-end and July-end Will not attract CRR restrictions.
RESTRUCTURING SCHEME FOR LOANS TO MSMES
• There is already an existing scheme, those MSMEs who were struggling pay back their loans as of January 1, 2019 were given a one-year extension to “restructure” their loans with the banks by March 31, 2020.
• This facility has now been extended to MSME loans that had started defaulting as of January 1, 2020.
• They will now have till December 31, 2020, to restructure their loans.
LENIENCY IN REAL ESTATE PROJECTS
• RBI feels, there are many commercial real estate projects are stuck due to genuine reasons and which is beyond promoters control.
• By downgrading such loans to a non-performing asset status will, thus, not help anyone — neither the developer, nor the bank.
• Thus RBI has given an additional year before a loan given to real estate project, faces downgrading.