When economic turbulence strikes, the RBI steps in with tools like the repo rate. While banks feel the impact first, NBFCs are indirectly influenced as changes in market funding costs gradually shape their lending environment.
We often hear of repo rate cuts during crises, but what do they really mean? How do they help? And why does the RBI rely on this tool so heavily during economic downturns? In this article, we’ll walk through the RBI’s repo rate response to COVID-19, understand the logic behind repo rate cuts, and see how it influences the broader economy when things go south.
What Is the Repo Rate?
Before we dive into how it’s used during emergencies, let’s make sure the basics are clear.
The repo rate is the interest rate at which the RBI lends money to financial institutions against government securities. Think of it as the cost of short-term borrowing for banks and similar financial players.
When the repo rate is reduced:
- Borrowing becomes cheaper for financial institutions.
- They can offer lower interest rates to customers.
- This encourages spending and investment, which is critical during slowdowns.
On the other hand, increasing the repo rate discourages borrowing and helps control inflation. So, it's a powerful tool the RBI uses depending on what the economy needs.
What Happens During an Economic Crisis?
Economic crises rarely adhere to a predetermined pattern. They often exhibit a set of recurring features.
- Demand falls across the board
- Businesses cut spending
- Job losses mount
- Credit growth slows down
- Investment activity drops sharply
During such phases, restoring confidence becomes the top priority. That’s where monetary policy during financial crisis periods comes in—and the repo rate becomes a central tool in that process.
Why Repo Rate Cuts Matter in Crisis Situations
The logic behind repo rate cuts during pandemics or downturns is fairly straightforward. Here’s why they matter:
- Lower Borrowing Costs: When repo rates fall, financial institutions get funds at cheaper rates. They, in turn, reduce interest rates for customers.
- Boosts Demand: With cheaper loans available, people and businesses are more likely to spend and invest.
- Improves Liquidity: Easier access to money allows financial institutions to stay operational even during cash crunches.
- Supports Recovery: Reduced rates provide breathing room, giving the economy space to recover without the pressure of high interest costs.
Historically, NBFCs have maintained existing FD rates for several weeks to months after a policy change, as they balance funding needs and market competition.
Real Impact of Repo Rate Cuts During the Pandemic
Let’s break down how these changes played out in real terms.
1. Home Loan EMIs Became Manageable
One of the first places where repo rate cuts had a visible impact was in home loan repayments. Many borrowers saw their EMIs come down, especially if they had floating-rate loans. In a time of job losses and pay cuts, this provided some much-needed relief.
2. Working Capital Became Cheaper
For businesses struggling with cash flow issues, even a small drop in borrowing costs can make a big difference. Lower repo rates made short-term loans slightly more affordable, which helped some firms survive the worst phase of the lockdown.
3. Improved Cash Flow for Financial Institutions
Cheaper funding from the RBI meant that financial institutions didn’t have to scramble for liquidity. They could continue operations, roll over loans, and even extend moratoriums, as directed by the RBI.
4. Consumer Confidence Got a Push
Even though spending didn't bounce back immediately, the RBI’s steps—including repo rate cuts—laid the foundation for recovery. People started seeing EMIs go down, rates on personal loans eased, and that began to nudge consumer confidence upwards.
Table: Repo Rate vs Economic Indicators During Crisis
| Period | Policy Move | Impact on Economy |
| Early 2020 (Pre-COVID) | Neutral repo stance | Steady credit growth, inflation manageable |
| Mar–May 2020 | Sharp repo rate cuts | Attempt to revive demand, support liquidity |
| H2 2020 | Repo rate unchanged | Wait-and-watch, assessing transmission effectiveness |
| 2021–2022 | Gradual shift to neutrality | Focus on inflation as recovery began |
Limitations of Repo Rate Changes During Crises
As useful as repo rate cuts are, they have limitations, especially in a crisis like COVID-19.
1. Transmission Takes Time
Just because the RBI lowers the repo rate doesn’t mean every financial institution passes it on immediately. There's usually a lag between policy change and actual rate changes for customers.
2. Risk Aversion Persists
During uncertain times, financial institutions often become cautious. They may not extend fresh credit easily, even if they can borrow from the RBI at a lower cost. That limits the effectiveness of the rate cut.
3. Demand Isn’t Always Responsive
Even with low interest rates, if people are worried about losing jobs or businesses about poor sales, they won't borrow or spend. That’s exactly what happened in the early months of the pandemic.
Complementary Measures Helped Too
The RBI didn’t rely solely on repo rate adjustments. It also rolled out other measures that supported its monetary policy stance:
- Loan Moratoriums: Gave borrowers temporary relief without marking accounts as defaults
- Targeted Liquidity Measures: Made sure credit reached critical sectors like MSMEs
- CRR Reductions: Gave financial institutions more flexibility to lend
These measures worked hand-in-hand with repo rate cuts to create a broader safety net.
Longer-Term Outcomes of the RBI’s Approach
1. Controlled Panic in Financial Markets
Quick repo rate changes helped maintain trust in the RBI. Market participants felt assured that liquidity would be available if needed.
2. Set Up Recovery Framework
Even though the immediate impact wasn’t explosive, these changes laid the groundwork for recovery. As restrictions eased, the economy had an easier time bouncing back thanks to a low-rate environment.
3. Reinforced the RBI’s Role as Stabiliser
Perhaps most importantly, the entire episode underlined the RBI’s central role in economic crisis management. Its credibility, backed by timely repo rate changes, helped hold the system together.
Repo Rate and Economic Slowdown: A Broader Perspective
While the pandemic provided a textbook case of aggressive monetary easing, the repo rate is also adjusted during other forms of economic slowdown.
When Inflation Is High
If inflation starts rising dangerously, even in a slowing economy, the RBI may hesitate to cut rates. Balancing inflation control and growth support becomes tricky.
When Global Markets Are Volatile
External shocks, like rising oil prices or geopolitical tensions, can trigger economic slowdowns. In such scenarios, repo rate decisions must be aligned with both domestic and global considerations.
Takeaways for Borrowers and Savers
When the RBI cuts the repo rate, it sets off a ripple effect:
- Home loan EMIs can come down (if on a floating rate)
- Banks may revise FD rates, impacting retirees’ income
- Businesses may borrow more, driving job creation
- Inflation may ease, helping control food and fuel prices
Understanding the repo rate is not just for economists. It affects everyday financial decisions, including saving, borrowing, investing, and spending.
Lessons for the Future
The COVID-19 experience has reshaped India’s monetary response strategy. The repo rate will remain central to how the RBI reacts to future shocks. But policymakers are now more aware of:
1. Quick Action Matters
One of the key reasons India navigated the COVID-19 economic storm better than expected was the RBI’s prompt action. Delays in rate cuts can worsen the impact of a slowdown.
2. Repo Rate Is Just One Piece
Effective crisis response needs more than just rate tweaks. It needs complementary steps, like sectoral support, regulatory easing, and clear communication.
3. Communication Builds Trust
Throughout the pandemic, the RBI maintained a consistent communication strategy. People understood the "why" behind every move. That transparency made a real difference.
Conclusion
Amid evolving rate cuts, NBFC fixed deposit rates often adjust more slowly than banks, offering a potential window for investors to lock in prevailing yields. Observing these transmission lags can help inform more strategic fixed-income allocation decisions in the current environment.
