Starting with the rate cut of about 0.75% straight. This is the lowest repo rate since 2001 and going below 4.5% since 2009.
Similarly, the reverse repo rate has been cut by 0.9% to just 4% now.
The Summary of the above rates:
1. Repo is where the banks borrow overnight from the RBI giving the Government securities which they own as collateral.
2. Reverse repo is where the banks park in their money overnight with the RBI, receiving the government securities which RBI owns as collateral.
The RBI has cut the rates with an idea that if the banks can borrow at a low from RBI, the banks will further offer loans cheaper to the public and to the corporates.
Currently the banks have been parking in close to 300,000 cr. per day and have not needed to borrow much from the RBI.
With the rates cuts, the interest that banks earn from the RBI falls from about 5% to 4% and the banks will be forced to lend to the economy instead of parking money with the RBI.
This will compel banks to pass on the rate cut advantage to the borrowers through competition. State Bank of India, has already lowered the rates by 0.75%.
This will impact the economy only after the lockdown. However, the corporate borrowers can benefit from this now.
Likewise, the deposit rates have been cut by SBI, including the savings bank rates. This will encourage people to take risk and invest their money elsewhere.
Every bank must maintain a 4% deposit with the RBI as Cash Reserve Ratio. That puts a huge chunk of cash with the RBI earning no interest. To release a part of this into the economy, the RBI cut the CRR by 1%.That makes the effective rate of 3%.
Adding on to this, banks must not ever have less than 90% of the CRR level at anytime. Even if its at 90% level for a week, the next week it should be at 110%. That is over a 14 days period, it can be made up. But now, in a time of crisis, when liquidity must be high, the RBI has lowered the limit to 80% till the end of June.
Next comes the MSF limits. Banks can borrow upto 2% of their deposits in the repo auctions from RBI. But if it needs more, it has to pay more. A Marginal Standing Facility is available for another 2% of their deposits. It will be borrowed at a rate of about 0.25% more than current repo rate.
The MSF has now been revised to 3%, which will allow banks to borrow more from the RBI.
Further, the RBI has suggested to offer a 3 month extension( interest does not form a part of this). EMI relaxations for 3 months could be given my banks, stretching out the loans for three months longer than initially scheduled, without being labeled as NPA.
Basically, the RBI has released cash into the economy to fuel up the growth. This is good thing by the RBI, specially slashing the rates. This will eventually compel people to invest in risky assets and keep the economy cycle moving. But it will take a while for the economy to recover.