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1. A day after Modi govt began its economy rescue in right earnest with a Rs 1.70 lakh crore coronavirus counter, the Reserve Bank of India joined the big fight today with a host of measures aimed at minimizing the damage from Covid-19.
2. In view of the COVID-19 pandemic, the Monetary Policy Committee (MPC) decided to advance its meeting scheduled for 31st March, 1st and 3rd April 2020. It met on 24th, 26th and 27th March and undertook a careful evaluation of the current and evolving macroeconomic and financial conditions, and the outlook.
3. After extensive discussions, the MPC voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target.
4. While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 per cent.
5. Simultaneously, the fixed rate reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, was reduced by 90 basis points to 4.0 per cent, thus creating an asymmetrical corridor.
6. The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy.
7. It may be recalled that during the month of March so far, banks have been parking close to ₹ 3 lakh crore on a daily average basis under the reverse repo, even as the growth of bank credit has been steadily slowing down.
8. This decision and its advancement has been warranted by the destructive force of the corona virus. It is intended to
- mitigate the negative effects of the virus
- revive growth
- preserve financial stability.