Impact of RBI’s interest rate cuts

Looking at the pictures of migrants walking back home on highways, it is clear that the human cost will also be about livelihoods lost, not just lives lost. In other words, social distancing is economic distancing.

To minimize the impact and ensure that the economy is on the right track, governments across the world have announced fiscal and monetary interventions. India was the latest to do so when it announced a relief package of ₹ 1.7 lakh crores, sharp cut in interest rates, and increase in the liquidity of the banking system by ₹ 3.7 lakh crores. While the relief package was announced by the Finance Minister, the change in interest rates and other measures decided by the RBI's Monetary Policy Committee (MPC) was announced by the RBI Governor on 28 March.

Let's look at these changes and their impact on your finances.

The RBI has implemented many monetary measures to minimize the economic impact of Covid-19.

Repo rate cut by 75 bps

The Repo Rate (or Repurchase Rate) is the rate at which banks borrow money from RBI. By bringing down this rate from 5.15% to 4.4 %, its sharpest reduction in over a decade, RBI has nudged banks to make loans cheaper. As a result, the State Bank of India and Bank of Baroda lowered its interest rate by the same degree for loans linked to external benchmarks.

Reverse Repo rate cut by 90 bps

As evident from the name, this is the rate at which banks lend their excess cash on an overnight basis to the RBI. By bringing down this rate from 4.9% to 4%, the central bank has signalled banks to lend their money to others in the economy. Soon after, the SBI reduced its interest on term deposit by 20 bps to 50 bps. This was followed by the government cutting interest rates in PPF, Sukanya Samriddhi, and other savings schemes.

CRR cut by 100 bps

The Cash Reserve Ratio is the minimum share of total deposits that commercial banks have to maintain either as cash or deposits with the RBI. By reducing this from 4% to 3%, ₹1.37 lakh crores will be released into the banking system.

Loan Moratorium

To help overcome any cash flow problems or disruptions caused by Coronavirus, the RBI has allowed banks to grant a moratorium to borrowers in paying their term loans including credit card payments. However, since interest will continue to accumulate, one should opt for it only in case of difficulties of repaying.

How will these help the economy?

As one man's expenditure is another man's income, an economy -- for the most part -- is essentially a series of economic transactions between people. These transactions, be it with our housekeeper, barber, travel agents and many other service providers, have dried up in the lockdown imposed to deal with the pandemic. 

Since the lockdown cannot be lifted immediately, the Central Bank and Government are implementing different measures to tackle these effects. Through banks, the RBI has taken steps to improve credit availability, add nearly Rs. 3.7 lakh crores, and encourage people to borrow more and spend. Put simply, the end goal is to increase these transactions and get the economy back on its feet.