The Reserve Bank of India (RBI) cut interest rates in an unscheduled announcement yesterday, ramping up support for an economy that it expects will contract for the first time in more than four decades.
RBI Governor Shaktikanta Das reduced the benchmark repurchase rate by 40 basis points to 4 percent, the lowest since 2000, when the measure was introduced. The reverse repurchase rate was cut to 3.35 percent from 3.75 percent. The monetary policy committee, which met ahead of its scheduled meeting early next month, kept its “accommodative” stance, implying that it could ease further.
“Going forward, we will continue to be vigilant and we will take whatever measures are necessary to meet the COVID-related challenges which 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.”
The central bank expects the economy to contract in the fiscal year through March next year as the impact of the COVID-19 pandemic and measures taken to contain it severely affect domestic activity.
The yield on the most-traded 2029 bonds fell 14 basis points to 5.89 percent, while that on the new 10-year notes dropped 9 basis points to 5.68 percent. The rupee weakened and the S&P BSE Sensex erased gains of as much as 0.6 percent to halt a three-day rally.
“The off-cycle move may have caught the markets off-guard, but it shouldn’t be a total surprise given recent dismal activity indicators,” said Prakash Sakpal, an economist at ING Groep NV in Singapore. “GDP is headed for a sharp contraction, as much as 5 percent year-on-year on my estimate, in the current quarter.”
Das also outlined the following measures: A moratorium on bank loans was extended for another three months; rules for withdrawal of funds by states were relaxed; a limit on banks’ group exposure to companies was raised to 30 percent from 25 percent; pre- and post-shipment credit rules for exporters were eased; foreign portfolio investors were given an additional three months to meet investment needs.
The RBI’s previous cut of its benchmark rate was on March 27 following an emergency policy meeting.
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