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In order to push lending and facilitate credit flow, the Reserve Bank of India made an unexpected cut its key deposit rate for the second time in three weeks to discourage banks for parking idle funds with it and push them toward lending to revive the flagging economy amid the coronavirus lockdown.
The RBI cut its reverse repo rate by 25 basis points (bps) to 3.75% with immediate effect, RBI Governor Shaktikanta Das said in a video conference. The rate had already been cut by 90 bps on March 27. While this move will benefit every lender but MSMEs are the ones which are already under a great focus for revival push and a lot of demands have come from various forums for SMEs. The COVID-19 scenario has undoubtedly impacted the MSME sector at a large level and to revive their business activity, which is almost at a halt, needed to have a strong and proactive banking support system.
The central bank kept its benchmark repo rate unchanged at 4.40% after a 75 bps cut last month.
Since his last address on March 27, Das said that India's economic and financial landscape has "deteriorated precipitously" in some areas.
Prime Minister Narendra Modi extended on Tuesday a lockdown of India's 1.3 billion population till May 3 as the number of coronavirus cases went past 10,000 despite a three-week shutdown announced last month.
"The surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI," Das said.
"In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed rate reverse repo rate," he added.
Indian banks have been extremely wary of lending over the last few quarters as the economy has cooled and those fears have only increased in recent weeks as business activity collapses.
Banks have parked more than 6 trillion rupees ($78.44 billion) with the RBI under the reverse repo in recent days, highlighting the extent of surplus rupee funds in the system.