RBI Cuts Repo Rate By 40 Bps To 4%

BUSINESS MAVERICK SARB cuts rates by 50 basis points as expected and predicts 2020 GDP contraction of 7%

By Ed Stoddard• 21 May 2020

"Instead the moratorium on all term-loans has been extended by three months along with an Funded Interest Term Loan (FITL) plan for loan recoveries from 1 September 2020 to 31 March 2021".

RBI Governor Shaktikanta Das said during a press conference today, "This will facilitate the flow of funds at affordable rates and revive animal spirits".

"Economic contractions are expected to be deepest in the second quarter of 2020, with gradual recoveries in the third and fourth quarters of the year", he said. That is welcome. But what is the point of converting the interest accumulating over the six-month moratorium on loan servicing into a funded interest term loan, if it has to be fully amortised this fiscal itself?

"RBI's Monetary Policy Committee met again from May 20-22".

The reverse repurchase rate was cut to 3.35% from 3.75%.

Inflation is expected to fall below the 4 percent target by Q3, Q4, the RBI Governor said. It is being speculated that with the extension of the lockdown till May 31, the moratorium will be extended for a period of another three months.

He said that the MPC voted 5:1 in favour of a 40 bps rate cut.

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"All this (the rate cut) was expected and will provide support especially so as the lockdown has been quite severe for the last two months or so impacting activity", analysts at CARE Ratings said, hinting that the markets reacted negatively to the move because of the negative growth statement from Das.

India's central bank slashed interest rates on Friday in an effort to contain the economic fallout of the world's largest coronavirus lockdown and warned the economy could contract this year. "The top 6 industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones", RBI governor Shaktikanta Das said. The central bank has already pumped in more than $50 billion into the financial system and announced targeted liquidity operations to support some sectors of the economy.

Making the announcement through an online address, RBI Governor Shaktikanta Das said the Monetary Policy Committee of the central bank in an unscheduled meet has reduced the key - repo - rate to 4 per cent from 4.40 per cent. Job losses are also expected to be widespread, the governor said.

Das said the combined impact of demand compression and supply disruption will depress economic activity in the first half of the April 2020 to March 2021 financial year. This, he added, has taken a toll on fiscal revenues.

RBI Governor says India seeing a collapse of demand; electricity, dip in petroleum product consumption; fall in private consumption.

Das said that the monetary policy transmission has improved and added that improvement in passing lower rate to the borrowers has been noticed across various segments.

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