Opinion is divided on whether the RBI’s decision to cut the reverse repo rate will lead to a greater flow of funds to cash-starved companies laid low by the lockdown, particularly MSMEs.
Reverse repo is the overnight lending rate banks get for parking their surplus funds with the RBI. The RBI on Friday lowered this rate by 25 basis points to 3.75 per cent with immediate effect.
The key objective behind the move was to force banks to shed their risk averseness and give loans to companies and individuals, to get the economy up and running as quickly as possible.
Some analysts said the lenders would now shun their lazy banking practices. Still others said it would not make much of a difference in terms of credit flow, though more money would be shovelled towards the retail segment where the level of NPAs is relatively low.
Following the slowdown in the economy and the pandemic, the RBI has pumped huge liquidity into the system. In March 27 alone, it pumped more than Rs 3.74 lakh crore .
However, banks have been deploying the liquidity in the RBI’s reverse repo window. RBI governor Shaktikanta Das on Friday said the apex bank absorbed Rs 6.9 lakh crore under reverse repo operations on April 15 alone.
Systemic liquidity surplus, as reflected in net absorptions under the liquidity adjustment facility (LAF), averaged Rs 4.36 lakh crore during the period March 27- April 14.
“The reduction of reverse repo is significant but it needs to be seen if the flow to the private sector actually increases,” Care Ratings chief economist Madan Sabnavis said.
“Given the still sizeable funds that is being parked with the central bank under the reverse repo operations even after the 90 basis points cut in March, points to the limited credit and risk appetite of financial institutions,” DBS Bank India economist Radhika Rao said.
Icra principal economist Aditi Nayar said the cut in the reverse repo rate is likely to nudge banks to explore alternative sources of fund deployment.
Soumya Kanti Ghosh, group chief economic adviser, SBI, said the lowering of the rate will disincentivise banks.
