RBIpredictseconomyto shrink, cuts policyrate
Repo rate slashed to 4%, loan moratorium extended by 3 months up to Aug 31
MUMBAI/NEWDELHI: The Monetary Policy Committee of the Reserve Bank of India (RBI) cut the policy rate by 40 basis points to 4.0% on Friday, acknowledging the adverse impact on the Indian economy of the coronavirus disease (Covid-19) and the lockdown imposed to combat its spread.
A basis point is one-hundredth of a percentage point. RBI has so far cut its policy rate by 115 basis points since the crisis began to a historic low.
RBI governor Shaktikanta Das also extended the moratorium on payment of term loans (this includes mortgages or housing loans taken out by individuals, even personal loans) by another three months to August 31.
The moves are expected to make loans cheaper, and give borrowers a break from monthly loan repayments at a time when they are financially stressed. The interest for these six months will be treated as a loan that will have to be paid by the end of this financial year (March 31).
Interestingly, Das admitted that growth will be in “negative territory” this year, the first time anyone in the government or the central bank has admitted that India’s gross domestic product (GDP) will shrink this year.
Chief economic advisor Krishnamurthy Subramanian has maintained that GDP growth will be 1-2% this year and the International Monetary Fund predicted, on April 14, that India would grow by 1.9%. Goldman Sachs on Sunday said it expected India’s economy to contract 45% on an annualised basis in the quarter ending June, and by 5% in the financial year. “The end-May 2020 release of NSO [National Statistical Office] on national income should provide greater clarity, enabling more specific projections of GDP growth in terms of both magnitude and direction,” Das said.
Das announced the cut, and other measures aimed at keeping “financial markets working, ensuring access to funds to everyone, and preserving financial stability” in a digital video address on Friday, his third since the lockdown began on March 25.
Stock-market investors weren’t impressed but bonds rallied. The Bombay Stock Exchange’s benchmark Sensex fell 0.84% to 30,672.59 points at the close of trading.The yield on the most-traded 2029 bonds dropped seven basis points to 5.96% at the close after falling more than 15 points intraday, while that on the new 10-year notes slid three basis points, Bloomberg reported. Bond prices and yields move in opposite directions. The rupee fell 0.5% to 75.9650 per dollar.
Das said that the economy has been hit hard by a collapse in demand and disruption in supply. Private consumption has fallen sharply, he added. But India’s foreign exchange reserves remain $487 billion, the governor said — an indication that the country is unlikely to face a crisis of the nature it did in 1991 when this was down sharply and barely adequate to fund a few days of imports. The current reserve is adequate to fund a year of imports, Das said.
India’s central bank has previously announced measures to tackle the economic crisis resulting from the pandemic (and the lockdown) on March 27 and April 17. According to the government, around ~8.01 lakh crore crore of the ~20 lakh crore Atmanirbhar Bharat Abhiyan (Self-Reliant India Campaign) announced by the government through last week is accounted for by monetary measures of the RBI.
On Thursday, the central bank announced measures aimed at improving the functioning of markets, to support exports and imports (the first is down by 60% in April and the second by 58%, the governor pointed out), to ease financial stress, and to help state governments financially. These include exemptions from borrowers being classified as defaulters and the loans as non-performing assets for another three months, and an extension of the timeline for resolution of bad loans.
The governor admitted that inflation in pulses, milk and vegetable oil has accelerated, primarily because of supply disruption, but added that the monetary policy committee expects this to ease in a few months.