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India cuts rate to lowest since 2000 to revive shrinking GDP

Published : Friday, 22 May, 2020 at 1:49 PM  Count : 182

Reserve Bank of India Governor Shaktikanta Das discusses the central bank’s decision to cut interest rates | Bloomberg

Reserve Bank of India Governor Shaktikanta Das discusses the central bank’s decision to cut interest rates | Bloomberg

India’s central bank cut interest rates in an unscheduled announcement on Friday, ramping up support for an economy it expects will contract for the first time in more than four decades.

Governor Shaktikanta Das reduced the benchmark repurchase rate by 40 basis points to 4%, the lowest since 2000, when the measure was introduced. The reverse repurchase rate was cut to 3.35% from 3.75%. The monetary policy committee, which met ahead of its scheduled meeting in early June, kept its “accommodative” stance, implying 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 2021 as the impact of the coronavirus and measures taken to contain the pandemic severely affect domestic activity.

The yield on the most-traded 2029 bonds fell 14 basis points to 5.89%, while that on the new 10-year notes dropped nine basis points to 5.68%. The rupee weakened and the S&P BSE Sensex index erased gains of as much as 0.6% 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% year-on-year on my estimate, in the current quarter.”

Das also outlined the following

•The moratorium on bank loans was extended for another three months
•Rules for withdrawal of funds by states were relaxed
•Limit on banks’ group exposure to companies raised to 30% from 25%
•Pre- and post-shipment credit rules for exporters eased
•Foreign portfolio investors given an additional three months to meet investment needs

The RBI last cut its benchmark rate on March 27 following an emergency policy meeting. Das said at the time that the RBI will continue to remain vigilant and would not hesitate to use any instrument -- conventional and unconventional -- to mitigate the economic fallout of the virus and preserve financial stability.

“With the realization that growth will be negative this fiscal year, the monetary panel” brought forward the rate cut, said Manish Wadhawan, founder at Serenity Macro Partners. “With limited space for fiscal expansion, the central bank will have to do the heavy lifting.”

The economy is heading for a 45% contraction in GDP in the quarter through June, according to Goldman Sachs Group Inc., and facing a full-year decline as consumption -- the backbone of the economy -- collapsed due to the government’s strict stay-at-home measures.

High frequency data has showed that demand is virtually non-existent. India’s dominant services industries crashed last month, while car sales also collapsed. Large swathes of the population have been left destitute, with an estimated 122 million people losing their jobs in April, many of them daily wage earners, a survey by the private sector Center for Monitoring Indian Economy showed.


Related Topics

India   GDP  

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