WTF is a Repo Rate & Other Financial Terms Covid-19 Will Teach Us


WTF is a Repo Rate & Other Financial Terms Covid-19 Will Teach Us

Illustration: Robin Chakraborty

The Coronavirus pandemic not only has severe medical and human life consequences, but also grave implications on the economy that could last a few years. Factories have shuttered, companies are under lockdown, trade has halted and restriction on movement of goods and people has ensured dire consequences for business.

Moody’s revised India’s economic growth projection for the year 2020 to 2.5% from 5.3%, a drop of over 50%.

Similar projections have been made by other institutions as well, with a State Bank of India report claiming India’s growth could be the lowest in three decades, with the curfew costing ₹8 lakh crores.

In order to arrest the difficulties faced by the most vulnerable in society, from daily wage labourers to migrants, Finance Minister Nirmala Sitharaman announced a ₹1.7 lakh crore economic package –  a couple of days after PM Modi’s address announcing the 21-day lockdown.

Your move, Reserve Bank of India.

After the Government announced its string of economic measures to look after one section of society, it was time for the RBI to announce its big-bang rate cuts that could bring businesses back in the game and help India navigate through this pandemic with sound financial health.

If you’re only familiar with acronyms like WTF, LMAO, YOLO and all of these words sounds like Greek and Latin, don’t worry. Just like Raaz Reboot, it only seems scary but isn’t.

WTF is a CRR and a bps?

Cash Reserve Ratio (CRR) is the amount of funds that every bank has to keep with the RBI at all times. Think of it like a kid keeping a part of his salary with his father. It’s a way for the father to keep check on his kid and ensure that he doesn’t have too much money (to buy dumb things like a winter jacket in Mumbai) or too little money.

If the RBI believes there’s execssive money in the system, it increases the CRR which means banks have to keep more money with the RBI, which means they will have less money to give out to individuals and companies. In times of an emergency like the current coronavirus pandemic, the RBI has reduced the CRR by 100 basis points (bps, geddit?) to 3%, which means banks will have to keep less money with the RBI and they will be able to disburse more, which will release ₹1,37,000 crores crores across the banking system.

Easy, peasy. What’s a repo rate and reverse repo rate?

Repo rate is the rate at which the RBI lends money to a commercial bank when they have shortage of funds. Reverse repo rate is the rate at which RBI borrows money from a commercial bank. Or to be more precise, the rate at which commercial banks park their excess money with the RBI. Why RBI? It is the safest.

Umm, that’s all fine and dandy but how does that affect… anything?

When RBI reduces the repo rate, banks get money at a cheaper rate from the RBI. Which means that the final consumer, whether a business or an individual borrower (us) would also get it at a cheaper rate. When the RBI reduces reverse repo rates, commercial banks are not incentivized to park their money with the RBI.

As has been the current case, a reduction in repo rate and reverse repo rate along with the CRR cut, will help inject more money into the system and lending will hopefully flow, which is the need of the hour when business and economic activity has frozen. You want everyone to borrow more, which gives more money into the hands of people and businesses, which results in more spending and kick starts a virtuous cycle.

Through all the measures, ₹3,74,000 crores will be injected  into the system.

The RBI also announced that banks and lending institutions are permitted to allow a moratorium of 3 months on payments of installments.

Wait, does that include my EMIs? The RBI clarified all retail loans including EMIs are covered.

The measures announced by the RBI Governor Shaktikanta Das were lauded by Prime Minister Modi as well as Finance Minister Nirmala Sitharaman.

However, in his speech, the RBI governor made a grim prediction that large parts of the world will slip into a recession.

And the speech ended with some wise advice.

Let’s hope he’s right, and this too shall pass.