RBI drastically slashes Repo and other key policy rates in its advanced MPC meeting

Today (March 27, 2020), the Monetary Policy Committee (MPC) announced  Seventh Bi-monthly Monetary Policy Statement, 2019-20 and slashed all the key policy rates. According to the announcement the MPC decided to advance its meeting scheduled for 31st March, 1st and 3rd April 2020 and met on 24th, 26th, and 27th March. As per the announcement in the Seventh Bi-monthly Monetary Policy Statement, 2019-20, today, it has been decided to reduce the policy Repo rate under the Liquidity Adjustment Facility (LAF) by 75 basis points from 5.15 percent to 4.40 percent and the Reverse Repo rate under the LAF stands adjusted from 4.90 percent to 4.00 percent with immediate effect. Consequently, the Marginal Standing Facility (MSF) rate stands adjusted from 5.40 percent to 4.65 percent with immediate effect. Further,   the cash reserve ratio (CRR) of all banks by 100 basis points to 3.0 percent of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28, 2020, for a period of one year. This reduction in the CRR would release primary liquidity of about ₹ 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR it said.

While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 percent, according to RBI Governor’s statement. With this reduction, RBI cumulatively reduced in the policy repo rate of 135 basis points in the recent past.

With the above changes, the present key policy rates will be as under.

All other terms and conditions of the extant LAF Scheme will remain unchanged. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth, the statement said. The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy while ensuring that inflation remains within the target.

The RBI governor in his statement said “MPC noted that global economic activity has come to a near standstill as COVID-19 related lockdowns and social distancing are imposed across a widening swathe of affected countries. Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed. The outlook is now heavily contingent upon the intensity, spread, and duration of the pandemic. There is a rising probability that large parts of the global economy will slip into recession”.

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