The Reserve Bank of India (RBI) on Friday unexpectedly cut its repo rate by 40 basis points for a second time this year after an off-cycle policy review to counter the economic fallout from an ongoing nationwide lockdown to contain the spread of the coronavirus disease.
RBI governor Shaktikanta Das said the short-term lending rate now stands at 4% down from 4.4% earlier. The reverse repo rate was also reduced by 40 basis points to 3.35%.
Shaktikanta Das said in a video conference that the central bank’s Monetary Policy Committee (MPC) had voted to maintain its “accommodative” stance and five out of six members were in favour of a rate cut.
Das said MPC members met for three days in an off-cycle meeting, which was otherwise scheduled for June 3 to June 5.
It had last slashed the benchmark interest rate on March 27 by a massive 75 basis points and also announced a three-month moratorium to be given by banks to provide relief to borrowers whose income has been hit due to the lockdown.
“We must have faith in India’s resilience and come out of all odds,” the RBI chief said.
RBI had also unexpectedly cut its key deposit rate or reverse repo rate to 3.75% in April to discourage banks from parking idle funds with it and spur lending instead. The rate had already been cut by 90 bps on March 27.
In March, RBI had also allowed a three-month moratorium on payment of all term loans due between March 1 and May 31, 2020. Das said on Friday it is now being extended for an additional three months till August 31.
The central bank’s governor on Friday said the economy is witnessing a collapse of demand as suggested by electricity, petroleum products and private consumption data and added that the government revenues have also been impacted severely.
“Private consumption has taken the biggest blow due to the COVID-19 outbreak. Investment demand has halted,” Das said.
A combination of monetary, fiscal and administrative measures is being undertaken by RBI and the government would create conditions for a revival of economic activity in the second half of FY21, he said.
“But the downside risks to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing and lockdowns,” he said.
The GDP growth for FY21 is seen to be in the negative territory, Das said. Headline inflation, he said, may stay firm in the first half of the financial year and is expected to ease below 4% in the third and fourth quarters of FY21, he said.
Last month, the RBI had also announced another round of targeted long-term repo (TLRO) operations and opened a refinance facility for the National Bank of Agriculture and Rural Development, the Small Industries Development Bank of India and National Housing Bank to meet the long-term funding needs of various rural and small sectors.
The government has announced a Rs 20 lakh crore economic stimulus package to deal with the fallout of the coronavirus pandemic that included Rs 8 lakh crore of liquidity measures announced by RBI since March.