Covid fallout: RBI sees GDP contract, cuts repo rate by 40 basis points to 4%

By: and |
May 23, 2020 12:20 AM

Reserve Bank of India (RBI) governor Shaktikanta Das on Friday said the economy would likely contract in the first half of 2020-21 and moved to cut the repo and reverse repo rates by 40 basis points each to 4% and 3.35% respectively.

While the cut in the repo should translate into lower loan rates, it might not persuade banks to step up lending meaningfully.While the cut in the repo should translate into lower loan rates, it might not persuade banks to step up lending meaningfully.

Reserve Bank of India (RBI) governor Shaktikanta Das on Friday said the economy would likely contract in the first half of 2020-21 and moved to cut the repo and reverse repo rates by 40 basis points each to 4% and 3.35% respectively. “For the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant,” Das observed in an address to the media.

The bond markets shrugged off the surprise 40 bps repo rate cut with the benchmark yield falling by just 3 bps to 5.75%. The absence of much-anticipated measures to absorb the large supply of bonds, either in the primary or secondary markets, left the markets disappointed. Ananth Narayan, professor-finance at SPJIMR, noted there was no surprise beyond the timing. “In any case, with market repos being dealt at 2.5%, the policy repo rate has less significance for bond markets now than before,” Narayan said.

While the cut in the repo should translate into lower loan rates, it might not persuade banks to step up lending meaningfully. Loan growth has been sluggish at around 6-6.5% year-on-year as banks remain risk averse. Governor Das too acknowledged credit growth remains muted though he pointed out investments in CP, bonds debentures in 2020-21 so far had increased sharply.

Meanwhile, bankers hinted deposit rates might fall further as they move to protect margins while offering cheaper loans. Rajnish Kumar, chairman, State Bank of India (SBI), said a call would be taken at the ALCO (asset liability committee). “Obviously, the scenario right now is that interest rates are going down. They go down for borrowers, they go down for depositors,” Kumar said on Friday.

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