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RBI cuts repo rate by 40 bps to 4%, maintains accommodative stance

Five of six MPC members voted in favour of the rate cut, Das said.

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Last Updated: May 22, 2020, 01.55 PM IST
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40 bps repo rate cut, negative GDP outlook, says Shaktikanta Das at RBI Gov PC
40 bps repo rate cut, negative GDP outlook, says Shaktikanta Das at RBI Gov PC
NEW DELHI: The Reserve Bank of India on Friday announced a surprise 40 basis points repo rate cut in an off-cycle policy review. The short-term lending rate now stands at 4 per cent, down from 4.4 per cent earlier. The repo rate has, thus, fallen to the lowest level since 2000.

The reverse repo rate has also been reduced by a similar measure to 3.35 per cent from 3.75 per cent earlier.
The central bank maintained its 'accommodative' stance.

RBI Governor Shaktikanta Das announced the decision of the Monetary Policy Committee at a press conference. He said five of six MPC members voted in favour of the rate cut.

The RBI Governor said the MPC members met for three days in an off-cycle meeting, that was otherwise scheduled for June 3-5.

The interest accrued on the working capital facilities during the moratorium period is proposed to be converted to a funded interest term loan which is payable by end of FY21. "This will provide some relief particularly to the MSME and the corporate borrowers who are likely to witness liquidity challenges for an extended period of time. In our opinion, going forward, there may be a need to provide special dispensation for a more comprehensive restructuring of loans at least in some of the relatively vulnerable sectors," said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.

"RBI, which has been proactive in recent times, has risen to the occasion by advancing the policy meet to cut policy rates by 40 bps. Also, the unequivocal statement that monetary policy will continue to be accommodative till growth revives sends out positive signals," said VK Vijayakumar- Chief Investment Strategist- Geojit Financial Services.

He said the fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models.

Das said the Indian economy is witnessing a collapse of demand as suggested by electricity, petroleum products and private consumption data. "Private consumption has taken biggest blow due to Covid-19 outbreak. Investment demand has halted," he said.

Due to the slowdown, the government revenues have also been impacted severely, Das said.

Das said a combination of monetary, fiscal and administrative measures being undertaken by RBI and the government would create conditions for a revival of economic activity in the second half of FY21. "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.

Overer all, 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. It is expected to ease below 4 per cent in the third and fourth quarters of FY21, he said.

Amid the Covid disruptions, multiple rating agencies and government organisations have already revised India's growth rate for the current financial year to near zero.

The worst projection so far has come from Goldman Sachs, which has projected India’s GDP growth to fall to -3.6 per cent in 2020 with further downside risks, revising its earlier forecast of -2.5 per cent.

Global rating agency Moody's has slashed India's GDP growth rate at zero for this financial year. However, on a positive note, it has forecast India's GDP growth rate to bounce back to 6.6 per cent in 2021-22.

The UN has slashed India's economic growth is forecast to slow to 1.2 per cent in 2020, a further deterioration from the already slowed growth of 4.1 per cent in 2019.

Domestic ratings agency ICRA sharply revised its growth expectation for India to a 5% contraction in the current fiscal from 1-2 per cent growth earlier.

NK Singh, Chairman of the 15th Finance Commission, on Thursday said is the Covid disruption could limit India's GDP growth between -6 per cent and 1 per cent in the financial year 2020-21.

Meanwhile, the RBI announced roll over of Rs 15,000-crore refinance facility for SIDBI for 90 days. The export credit period has been increased to 15 months from 1 year.

The central bank also extended moratorium on loan repayments by three more months. Banks so far are offering moratorium to retail customers on a blanket ‘opt-out’ basis and to wholesale customers on case-to-case ‘opt-in’ basis.

Shares of financial companies came under severe selling pressure after RBI's announcements, and they also dragged BSE Sensex some 320 points lower to 30,605.

Private lender ICICI Bank tanked the most at 2.81 per cent at around 10.30 am (IST). It was followed by Axis Bank (down 2.77 per cent), Bajaj Finance (down 2.74 per cent). HDFC Bank and Kotak Mahindra Bank were also down over 1.50 per cent in the morning trade. The BSE Bankex was down 2.17 per cent at 19,964.

Among rate-sensitive indices, BSE Auto and Realty indices are down 1.05 and 0.55 per cent, respectively.

Along with the reduction in policy rates, the RBI announced several measures:

  • This comes on top of the INR9.42trn of liquidity provisioning since the February MPCAmong the steps announced today, the following measures stand out: Steps announced by RBI to improve rate cut transmission, and provide regulatory support to banks, corporates and trade entities
  • RBI has allowed banks to extend the debt moratorium by another 3 months, and has given relaxations to banks to increase group exposure limits for corporates (from 25% to 30%), along with permission to convert interest costs accumulated during the moratorium into an extended loan to be repaid within the financial year, along with other steps to augment working capital availability.
  • To support exports/imports, RBI has increased pre- and post-shipment credit facility, along with a INR150bn credit line extension to EXIM Bank.
  • To support capital flows, RBI noted that FPIs under the Voluntary Retention scheme can take an extra three months to meet their investment commitments.
  • For state financing, RBI has allowed measures to relax access for states to the consolidated fund, which should help in relieving stress in state financing.

"A rate cut of 40 bps is line with expectations and so the extension of loan moratorium. The measure to convert the moratorium interest payment into a term loan payable in course of FY21 is the most important announcement. This can reduce NPA, at least in the next 12 month," said Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers.

The governor said that the group exposure limit for lenders to corporates has been raised to 30 per cent from 25 per cent. Friday's was the third presser by the governor in the last two months. The first one was held on March 27 and the second one was on April 17.

Das said that the RBI will be vigilant in battle readiness to address dynamics of unknown future and will preserve financial stability.

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