NEW DELHI -- The Reserve Bank of India on Friday provided fresh liquidity to the economy by cutting reverse repo rates by 25 basis points, to 3.75%, and announcing an infusion of one trillion rupees ($13 billion) to help shadow banks and micro finance companies, as well as to boost credit to farmers, small businesses and the housing sector amid the coronavirus crisis.
"The mission is to do whatever it takes to prevent the epidemiological curve from steepening any further," RBI Governor Shaktikanta Das said in a televised statement. "It is during our darkest moments that we must focus on light."
India, which has confirmed 13,387 coronavirus infections and 437 deaths, is in its 24th day of a lockdown, which is to remain in place until May 3.
The RBI's steps, according to the Finance Ministry, are aimed at maintaining adequate liquidity in the system, incentivizing bank credit flows, easing financial stress and enabling the normal functioning of markets.
The central bank said 500 billion rupees would be aimed at mid-sized and small non-banking finance companies or shadow banks and micro finance institutions, through a targeted long-term repo operation. This amount can be revised upward if needed in the future.
Gov. Das also announced a special refinancing facility, again totaling 500 billion rupees, in order to increase credit to farmers, to micro, small and medium enterprises and to the housing sector. Of the total amount, 250 billion rupees goes to the National Bank for Agriculture and Rural Development; 150 billion rupees to the Small Industries Development Bank of India; and 100 billion rupees to the National Housing Bank.
The RBI's latest move follows action it took on March 27, cutting the benchmark interest rate by 75 basis points to 4.4%, a level not seen in more than a decade. It also trimmed the reverse repo rate by 90 basis points, to 4%, on that day. The reverse repo is an interest rate on commercial banks' deposits to the central bank.
Citing the latest global growth projections by the International Monetary Fund, Gov. Das said India was among the handful of countries expected to cling on tenuously to positive growth at 1.9% in the current fiscal year that began on April 1. "In fact, this is the highest growth rate among the G20 economies," he said, adding that India is expected to post a sharp turnaround and grow at 7.4% in the next financial year.
From Feb. 6 to March 27, liquidity injections from the RBI have equated to 3.2% of the country's gross domestic product.
"What the RBI has done today is basically try to provide some kind of a cushion to some of the productive sectors [of the economy], especially construction, micro, small and medium enterprises, or MSMEs, and also [the] agriculture sector," Prof N. R. Bhanumurthy of the New Delhi-based National Institute of Public Finance and Policy told the Nikkei Asian Review. "Overall, it is going to help financial and banking sectors significantly."
"But there was also a small catch as Gov. Das hinted about the RBI receiving 6.9 trillion rupees through the reverse repo window, and that shows that perhaps there are still some demand issues when it comes to the credit situation in the country," he added.
Prof. Bhanumurthy said he was not really sure if the RBI could make banks to do more business by reducing the reverse repo rate by 25 basis points. "I think it is more to do with the credit demand at this stage. So, maybe the RBI is also trying a carrot and stick policy, forcing the banking industry to perform and [boost the] credit to needy sectors."
According to Mihir Vora, director and chief investment officer of Max Life Insurance, the RBI announcements "are very essential to support the weakest segments" of the economy.
Its steps would ease some of the burden on the financial system and help keep credit flowing to the economy, he said in a statement. "We expect a continuation of such measures by the RBI and government, given the gravity of the situation."
"Overall, the measures are timely and welcome, though maybe not a 'bazooka' like we have seen in the highly unconventional tools used by the US Fed, European Central Bank, Bank of Japan, etc," he added. "All eyes are now on the government to announce fiscal measures to support the economy."
Equity benchmark BSE Sensex and NSE Nifty50 index were trading around 1.6% higher as of 1.35 p.m. local time following Gov. Das' announcement.