India: Reserve Bank of India cuts interest rates after emergency meeting
Following an emergency monetary policy meeting ending on 27 March, the Reserve Bank of India (RBI) cut all interest rates to buffer the economy in the face of disruption caused by the coronavirus pandemic and related containment measures. Breaking with recent precedent, however, the three main interest rates were lowered differently, creating an asymmetrical interest rate corridor.
The reverse repo rate, which is the rate at which banks are paid for depositing cash at the RBI, was cut by 90 basis points to 4.00%. Meanwhile, the repo rate, which is what the RBI charges banks for borrowing from it, was cut by 75 basis points to 4.40%, and the marginal standing facility rate, which is what the RBI charges bank for borrowing from it at times of tight liquidity, was cut by 75 basis points to 4.65%. The purpose of this new corridor is to discourage banks from parking excessive amounts of cash at the RBI and to instead encourage them to lend to borrowers.
In addition, the Reserve Bank of India announced less conventional measures to encourage bank lending, including a cut to the cash reserve ratio, which is the share of deposits that banks have to deposit at the RBI, to 3.00% from 4.00%. The RBI also mandated moratoriums of three months on loan repayments, easing pressure on borrowers. All in all, the measures announced on 27 March should help to mitigate the costs of the coronavirus pandemic on the Indian economy, although they are unlikely to make up for the lost activity, especially given the three-week national lockdown that came into effect on 25 March.