MUMBAI: The Reserve Bank of India on Friday unexpectedly cut key interest rates by 40 basis points, citing negative GDP growth in the current fiscal amidst a “double whammy” of loss of production as well as demand even as it said it expected inflation to harden in the first half of the fiscal year. The RBI also allowed lenders to extend an ongoing moratorium on loan repayment, which was due to end on May 31, by another three months to August 31.
This is the second ‘off-cycle’ rate cut by RBI, which advanced its June monetary policy committee meeting to May 20-22. The MPC voted by a 5-1 majority to reduce the policy rate by 40 basis points from 4.4% to an all-time low of 4.0%. Consequently, the Marginal Standing Facility (MSF) rate and the bank rate stand reduced to 4.25% from 4.65%. The reverse repo rate stands reduced to 3.35% from 3.75%. The RBI has cut the repo rate by a total of 115 bps since the lockdown began in late March. It also marks the eighth straight rate cut by the RBI.
“By all counts, the macroeconomic and financial conditions are austere. The global economy is inexorably headed into recession…. Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory,” said RBI governor Shaktikanta Das while announcing the interest rate cut over a video broadcast. On inflation, he said that given limited data from the National Statistical Office, the RBI could not forecast a number but he expected prices to harden in the first half due to supply-side issues and soften in the second half of the year. The EMI on a 15-year Rs 30 lakh home loan will come down by nearly Rs 2350 since March. The rate cut will immediately result in home loans becoming cheaper for borrowers whose EMIs are linked to the repo rate. These include home loans and other retail loans. Interest rates on deposits are set to come down further given the surge in banks deposits and the fall in credit demand.
“Going forward, we will continue to be vigilant and we will take whatever measures are necessary to meet the Covid-related challenges that are ahead of us,” Das said. “The RBI will continue to remain vigilant and in battle readiness to use all its instruments and even fashion new ones, as recent experience has demonstrated, to address dynamics of the unknown future.”
RBI’s comments on the economy shrinking due to the Covid-19 pandemic and ongoing lockdown and the absence of any restructuring scheme for banks spooked markets Most of the major banks were in the red immediately after the policy announcement with the Sensex closing 260 points lower.
Addressing newspersons after RBI’s announcement, SBI chairman Rajnish Kumar said that the moratorium gives a breather to everyone until the cash flows post-lockdown can be assessed. He said SBI will take a holistic view of various components of its assets and liabilities and revise rates. All bank’s marginal cost of lending rate – the benchmark for loans to corporates – will get revised based on a formula next month. Retail borrowers whose loans are linked to the repo will see their interest rates come down by 40 bps from July.
Among the positive news highlighted by the governor was the improvement in forex reserves by $1.73 billion to $ 487.04 billion in the week to May 15, which is equivalent to 12 months of imports. The increase since April 1 is $9.2 billion. “Amidst this encircling gloom, agriculture and allied activities have provided a beacon of hope on the back of an increase of 3.7 per cent in foodgrains production to a new record. A ray of hope also comes from the forecast of a normal southwest monsoon in 2020 by the India Meteorological Department (IMD),” said Das.