The Reserve Bank of India’s Monetary Policy Committee (MPC), in an unscheduled meeting, today cut the policy repo rate by 40 basis points in a surprise move, after an unscheduled meeting of the Monetary Policy Committee.
The Reserve Bank of India’s Monetary Policy Committee (MPC), in an unscheduled meeting, today cut the policy repo rate by 40 basis points in a surprise move, after an unscheduled meeting of the Monetary Policy Committee, to contain the economic fallout of the coronavirus-lockdown. With this, the repo rate is down to 4% from the earlier 4.4%. Governor Shaktikanta Das said in a press briefing that the MPC unanimously voted to cut the repo rate keeping in mind the nation-wide lockdown. The MPC voted 5-1 in favour of a 40 basis point rate cut, while also bringing down the reverse repo rate to 3.35%. Shaktikanta Das, however, said the inflation outlook is highly uncertain due to the outbreak of the COVID-19 pandemic, and expressed concern over elevated prices of pulses.
Headline inflation, according to the MPC will remain firm in the first half of the fiscal year 2020-21, however, it said that by the third quarter it expects inflation to ease due to base effects. Das also said that there is a need to review import duties to moderate prices. The MPC has maintained an accommodative stance. More space will open up to address the risk to growth if the inflation trajectory remains as expected, Shaktikanta Das said.
Keeping in mind the economic impact of the coronavirus pandemic that has kept the majority of Indian population indoors since the last week of March, the MPC said it expects the Gross Domestic Product for this fiscal to remain in negative territory, forecasting some pickup in the second half of the fiscal year. The Reserve Bank of India has also decided to extend the moratorium on term loans that the central bank had proposed earlier, for another three months.
“By cutting the repo rate and reverse repo rate, RBI aims to inject more liquidity into the system. However, more importantly, what is needed is to remove the risk averseness as there is substantial liquidity in the banking sector. The rising food inflation rate could be a challenge to the RBI as it is following the inflation targeting regime. Similarly, the extension of the moratorium would bring in some relief to the borrowers, but it can put pressure on the bank’s balance sheet,” said Deepthi Mathew- Economist- Geojit Financial Services.
The MPC had earlier in March cut the repo rate by 75 basis points, with the most recent cut the RBI has now cut rates by 115 basis points to tackle the economic turmoil caused by the coronavirus pandemic. “Rate cut and reverse repo rate cuts are moves in the right direction but risk-aversion by banks is still there. Some restructuring of the loans news would have been a step in the right direction which the market was awaiting. Broadly it may be better for companies but banks may get hit in short term,” said Abhishek Goenka, Founder & CEO, IFA Global.
So far the Federal Reserve has cut rates by 150 basis points while the United Kingdom has seen a 65 basis point reduction. “With a cumulative 115 basis point rate cut by RBI as a response to the impact of COVID -19, we are in line with the rate cuts announced by developed economies like USA (150 bps) and UK (65 bps). Given the backdrop of an unprecedented economic situation, we are happy that the RBI has reduced the key policy rate and taken note of rate cut transmission to borrowers,” Shishir Baijal, Chairman & Managing Director, Knight Frank India.