RBI cuts repo rate by 40 bps to 4%

In a new set of measures to trim the impact of coronavirus on the economy, the Reserve Bank of India on Friday decided to cut the policy rate by 40 basis points from 4.4 per cent to 4 per cent. The reverse repo rate has been reduced to 3.35 per cent. It has also extended the moratorium on loan repayments by three more months.

In a video conference, RBI Governor Shaktikanta Das said the central bank's Monetary Policy Committee had voted to maintain its "accommodative" stance and members voted 5-1 on the quantum of the rate reduction. "The MPC voted unanimously for a reduction in policy repo rate and for maintaining the accommodative stance of monetary policy as long as it is necessary to revive growth and to mitigate the impact of Covid-19 while ensuring that inflation remains within the target," Das said.

Das said that the GDP growth in India in 2020-21 is estimated to remain in the negative territory.

"India is seeing a collapse of demand. Private consumption has seen the biggest blow due to the Covid-19 outbreak, investment demand has halted. The government revenues have been impacted severely due to slowdown in economic activity," said the governor.

However, he said that the combination of fiscal, monetary, and administrative actions will create conditions for the revival of the economy in the second half of FY21.

India's benchmark 10-year bond yield dropped as much as 18 basis points to 5.85% immediately after the rate cut was announced.

The RBI extended the moratorium on payment of loans by another three months till August to provide much-needed relief to borrowers whose income has been hit due to the coronavirus crisis.

In March, the central bank had allowed a three-month moratorium on payment of all term loans due between March 1, 2020, and May 31, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, were shifted across the board by three months.

As a result of this moratorium, individuals' EMI repayments of loans taken were not deducted from their bank accounts, providing much-needed liquidity. The EMI payments will restart only once the moratorium time period expires on August 31.

The moratorium on interest on working capital was also extended by three months. Interest accumulated for the six-month moratorium period can be converted into a term loan, Das said. Further, bank exposure to corporates has been raised to 30 per cent of the group's net worth from the current limit of 25 per cent, a move that will allow lenders to give larger loans to companies.

GDP growth in 2020-21 likely to in negative

India's gross domestic product (GDP) growth will be in negative territory in 2020-21 as the outbreak of coronavirus has disrupted economic activities. Das said the combined impact of demand compression and supply disruption will depress economic activity in the first half of the current fiscal.

"Assuming that economic activity gets restored in a phased manner in the second half of this year and taking in consideration favourable base effect, it is expected that combined fiscal, monetary and administrative measures currently undertaken by both the government and RBI create conditions for gradual revival of activities in the second half of 2020-21.

"GDP growth in 2020-21 is estimated to remain in the negative territory with some pick up in growth impulses in the second half of 2020-21 onwards," he said.

Inflation outlook highly uncertain

Das said the inflation outlook is highly uncertain due to the outbreak of the COVID-19 pandemic and expressed concern over elevated prices of pulses. He also said there is a need to review import duties to moderate prices.

Headline inflation may remain firm in the first half of the year and may ease in second half. Inflation may fall below 4 per cent in the third or fourth quarter of the current fiscal, according to the Governor. Further, Das said government revenues have been impacted severely due to the slowdown in economic activity amid the pandemic.

Other key takeaways:

RBI to roll over Rs.15,000-crore refinance facility for SIDBI for 90 days
RBI increases export credit period to 15 months from 1 year
RBI to extend Rs.15,000-cr line of credit to EXIM Banker
Inflation forecasting has become complicated due to (poor) data collection
Industrial production shrank by close to 17 per cent in March with manufacturing activity down by 21 per cent
Output of core industries contracted by 6.5 per cent

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