The Covid-19 outbreak didn’t break the humanity physically, but it also broke the humanity mentally, and more importantly economically.”

The Novel Coronavirus (COVID-19) has been declared a pandemic by the World Health Organization and has affected numerous countries, including India. In response to the developing COVID-19 situation the unforeseen pandemic has severely impacted contractual performance across the globe. The unforeseen coronavirus pandemic has interrupted our personal, professional, financial and commercial lives, to a point of preventing best performance at all levels; even rendering performance impossible.

"Time has come for RBI to unleash an array of instruments to expand liquidity in the system sizeably and to improve monetary transmission," the Finance Minister said.

This statement was given my finance minister while announcing the steps taken by RBI. To ease impact of lockdown, repo and reverse repo rates reduced and deferred the payment of Loan EMI’s for next three months. The Reserve Bank of India (RBI) has opened up the liquidity floodgates for banks even as it reduced the key interest rate sharply by 75 bps and allowed equated monthly instalments (EMIs) to be deferred by three months in a move to fight the economic impact of the countrywide lockdown to check the spread of novel coronavirus.

The repo rate was reduced to by 75 bps 4.4% while the reverse repo rate was cut by 90 bps point to 4%. The higher reduction in the reverse repo rate was aimed at prompting banks to lend more rather than keeping their excess liquidity with the RBI.

Hence the aim of this article is to briefly make you understand the significance of such steps and the effect that it will have on the economy and how the RBI gets to do all this. But before we move forward, it is necessary to understand and to know what all related steps have been taken by RBI in such direction.


The world is fighting an invisible assassin” quoted by Shashikanta Das while declaring the steps taken by them.

Listed here are some major decisions taken by the RBI in wake of reducing the burden on the people:-

· The RBI announced that there will be 75 basis points cut in repo rate, effectively taking the repo rate to 4.4% from the earlier 5.15%.

· RBI has allowed banks and financial institutions to put a moratorium on term loans.

· The RBI has also announced a comprehensive package, including measures to expand liquidity, steps to reinforce monetary transmission, efforts to ease financial stress by relaxing repayment and endeavour to improve the functioning of the market.

· The RBI also announced that the Cash Reserve Ratio (CRR) would be reduced by 100 bps, or 1%, to 3% . This would be applicable from March 28, and would inject Rs. 1,37,000 crores.

· The RBI will also undertake Long Term Repo Operations (LTRO); allowing further liquidity with the banks. The banks however are specified that this liquidity will be deployed in commercial papers, investment grade corporate bonds and non-convertible debentures.

· Lenders were allowed lending to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. The RBI also specified that such a move would not result in asset classification downgrade.

· The impact of all the announcements today shall inject almost 3.2% of GDP, the Governor said in his brief. The RBI also added that since February 2020 it had injected Rs 2.8 lakh crore of liquidity, equivalent to 1.4 percent of GDP.


Repo Rate is basically a repurchase option. i.e. the rate by which RBI gives loans to other banks. In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period. Bank gives loan to the public at a higher rate, often 1% higher than REPO rate, at a rate known as Bank Rate. Now, the decision made by the RBI will have a very essential effect at the borrowing capacity of the borrower in the time of lockdown. Since the earnings of the people who earn on daily wage basis will none, then in such a situation the reduction in the repo rate will lower the pressure on the people’s head.

The RBI allowed banks and Financial Institution to put a mortarium on the term loans for 3 months and it also clarified that the term loan includes Home, Auto, Personal, Agricultural, Retail and Corp Loans. Mortarium is also termed as EMI Holidays because it means that period for which the borrowers are given holiday from filling in the EMIs. Hence in order to reduce the burden of the borrowers this extension is given to them. Mortarium provided but RBI must not confuse with that facts that borrowers have to never pay the EMI, rather it is just a relief that is provided for a temporary provided in order to in order to provide relief since the country is about to see the biggest dip in income since 2009 recession.

After looking this changes that RBI has made it becomes imperative on our part to look into what actual changes can RBI make under its power.


Repo Rates

Repo rate is the rate at which the RBI loans to banks, regularly, against government securities. At the point when the RBI raises the repo rate, it turns out to be progressively costly for banks to borrow money from the central bank. At the point when the RBI cuts the repo rate by 25 basis point, for example it gets less expensive for commercial banks to obtain from the RBI. Along these lines, when the RBI raises the repo rate, home interest rates generally rise and when the RBI cuts the repo rate, home loan interest rates typically fall. At the point when this occurs, your equated regular scheduled payments decline as well. Be that as it may, this isn't really evident in light of the fact that in specific stages, banks have satisfactory money, and they don't depend on the RBI to get cash.

Reverse Repo Rates

Reverse repo rate is the rate banks charge on funds they invest into government securities with the RBI. At the point when the opposite repo rate increases, banks may raise home loan interest rates, since it turns out to be progressively gainful for commercial banks to put resources into low risk government securities as opposed to lending to individuals putting resources into property in India. At the point when the reverse repo rate falls, home credit loan costs may fall.

Base Rate

A base rate is most minimal loan fee that a bank charges its clients. The base rate is chosen by the banks. It is the rights of bank management to transform it. The RBI doesn't straightforwardly control it; however, it impacts it through the repo rate and different instruments. At the point when the RBI cuts the repo rate, for example, banks may bring down the base rate.

A base rate is lowest interest rate that a bank charges its clients. The base rate is chosen by the banks. It is the rights of bank management to transform it. The RBI doesn't straightforwardly control it; however, it impacts it through the repo rate and different instruments. At the point when the RBI cuts the repo rate, for example, banks may bring down the base rate.

Cash Reserve Ratio (CRR)

Cash reserve ratio is the percentage of bank deposits banks need to keep with the RBI. CRR is an instrument the RBI uses to control the liquidity in the system. Like take for example when the CRR is four, this implies the banks should keep Rs 4 with the RBI at whatever point bank deposits increase by Rs 100. Higher the CRR, lower the amount of money banks can loan out or contribute. In this way, when the CRR is higher, lower would be the liquidity and the other way around. It isn't fundamental that a hike in the CRR would prompt a hike in home credit loan cost. In any case, like a hike in the CRR reduces the supply of credit when the RBI hikes the CRR, banks would raise home advance loan costs if the demands for credit does not fall proportionately.

Statutory Liquid Ratio (SLR)

Statutory liquidity ratio is the percentage of funds banks need to keep up as liquid assets percentage of funds. Be that as it may, banks need to keep up these assets like government securities, bonds or valuable metals, and not as money. When the SLR is high, banks have less money for commercial operations and hence less money to lend out. When this happens, home loan interest rates often rise. When the SLR is low, similarly, home loan interest rates are likely to fall.

Both the CRR and the SLR influence the extent to which commercial banks can lend out money to home buyers. If the RBI keeps both these rates too high for too long, banks would become cautious and lend less. Home buyers seeking loans would find this to be a difficult situation to be in.

Hence these are some Rates though which RBI control the Liquidity flow in the country that is why it imperative for it take decisions regarding it very appropriately.


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.

The advance estimates of the National Statistics Office released in February 2020 implied real GDP growth of 4.7 per cent for Q4:2019-20 within the annual estimate of 5 per cent for the year as a whole. This is now at risk from the pandemic’s impact on the economy. High frequency indicators suggest that private final consumption expenditure has been hit hardest, even as gross fixed capital formation has been in contraction since Q2:2019-20.

The reasons for such taking such a step is surely a way forward to maintain the stability in the country. The decision of the RBI is to will prove as shock resistant to the economy that is about to come in the next few months when probably the entire situation gets somehow stable. But, what remains uncertain is the effect of the virus that may last. Hence the decision taken by RBI is in relation to the sustainable needs of the Domestic economy.


A situation like this has never been faced by our country due to which it become necessity for the country’s monetary policy makers to take the right decision in order to ensure that no burden is put on the people of this country in times of such situation. Hence such policy decision was taken by them to relive them from the panic that might have been there in the while getting to know about the lockdown situation. This decision is especially going to benefit the home buyers who were looking for some relief from the RBI’s. Just like any other difficulty our country has been through; it will pass through this also with also.


Veena Chandra

 HNLU, Raipur

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