In a surprise move, the Reserve Bank of India on Friday slashed the benchmark lending rate by 40 basis points to mitigate the impact of COVID-19 crisis. In an off-cycle meeting of the Monetary Policy Committee (MPC), the decision was taken unanimously to cut repo to support growth.
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Following the reduction, the repo rate has come down to 4 percent and the reverse repo rate has been cut to 3.35 percent.
In a video conference, RBI Governor Shaktikanta Das said the central bank’s Monetary Policy Committee (MPC) had voted to maintain its “accommodative” stance till growth revives and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
The MPC, headed by Das, has last reduced the repo rate (the rate at which central bank lends to banks) on 27 March by a staggering 0.75 percent to 4.40 percent.
Das on Friday also 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 31 August.
With the reduction in the repo rate by 40 basis points to 4 percent, it is likely that the savings bank interest rates as well as fixed deposit rates in financial institutions will see a further downward movement.
Inflation outlook ‘highly uncertain’
The RBI governor 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 percent 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.
Das said that soft global prices of metals and other industrial raw materials are likely to keep input costs low for domestic firms. He added that deficient demand may hold down pressures on core inflation (excluding food and fuel), although persisting supply dislocations impart uncertainty to the near term outlook.
GDP outlook to remain negative this year
There will be a gradual revival of activity and demand by the second half of FY-2021, said RBI governor. He added that gross domestic product will remain in negative territory this year with some pickup in the pulses segment.
Shaktikanta Das echoed the views of several global research reports that estimated a negative growth in India’s GDP. He said that there will be a gradual revival of activity and demand by the second half of FY21 and that it is essential to instill confidence at this point of time.
Relaxations offered for Consolidated Sinking Fund
The state governments maintain a Consolidated Sinking Fund (CSF) with the Reserve Bank as a buffer for repayment of their liabilities. In the light of the COVID-19 pandemic and the consequent stress on these state government finances, Shaktikanta Das said that RBI has decided to relax the rules governing withdrawal from the CSF, while at the same time ensuring that depletion of the fund balance is done prudently. This will enable states to meet a larger proportion of their redemption of market borrowings falling due in the current financial year from the CSF. These relaxations to states will release an additional amount of about Rs 13,300 crore.
Central bank hikes exposure limit for banks
RBI has hiked the group exposure limit for banks to 30 percent from 25 percent.
The central bank set the 25 percent limit in June 2019 and capped lenders’ exposure to a single party at 20 percent. Considering the current situation due to COVID-19 outbreak, this change has been made said Shaktikanta Das.
Major booster-shot for realty
Anuj Puri, Chairman – ANAROCK Property Consultants, said, the RBI’s repo rate cut is a welcome move. “Simultaneously, for the second time in a month, the reverse repo rate has also been slashed by another 40 bps and now stands at 3.35 percent. This is another big step which will ease liquidity for developers – the rate cut will not only send out positive signals but will enable banks to lend even more. Thus, the rate cuts combined with the further extension of loan moratoriums by 3 months up to August 31, 2020 augurs well for the real estate sector in the times to come. This move is a major booster shot aiming to cushion the impact of COVID-19 on the Indian economy. Beyond doubt, repo rate cuts do uplift the sentiments of home buyers even further. Home loan interest rates have already gone down substantially over the last year, and are presently at an all-time low averaging between 7.15 percent to 7.8 percent,” he said.
‘Limited impact in short-term’
Naveen Kulkarni, Chief Investment Officer, Axis Securities, said, “The rate cut announced today will have limited impact in the short term, but it is helpful to revive growth over the longer term. However, the decision to extend the moratorium period by another 3 months is a significant negative for the private banks both in the medium and long term. The impact on the banking sector will be negative.”
Vinay Pai, Head-Fixed Income, Equirus Capital, said, “With global economy headed towards recession, lockdown impacting government revenues and with the expected inflation heading below 4.00 percent it is a proactive step by the Central Bank to reduce policy rates by 40 bps and enabling measures for stability of financial markets, access to finance for all and overall financial stability.
Moratorium extension expected
Rajat Rajgarhia, MD & CEO, Institutional Equities, Motilal Oswal Financial Services, said “The RBI continues to support on the Monetary front by doing out of turn MPC meets to cut rates. Lowering the cost of capital is some relief in these times. Moratorium extension was expected, considering the economic activity levels. India would need more measures on a continous basis on both fiscal and monetary front to revive the economy from the current phase of negative growth.”
–With inputs from agencies