India central bank pledges more easing as economy set to shrink

Daniel Fowler
May 22, 2020

"Reverse repo rate stands reduced to 3.35%", Shaktikanta said.

"RBI's Monetary Policy Committee met again from May 20-22". The RBI Monetary Policy Committee voted unanimously for a reduction in the policy repo rate, while voted 5:1 in favour of the quantum of the cut, Shaktikanta Das said.

"High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments", he added.

"Domestic economic activity has been impacted severely by the two-month lockdown", he said and added that the top-six industrialised states that account for 60 per cent of India's industrial output are largely in red and orange zones.

However, he said that the combination of fiscal, monetary, and administrative actions will create conditions for the revival of the economy in the second half of FY21.

The RBI had on 27 March slashed the benchmark interest rate by a massive 75 basis points and also announced a three-month moratorium to be given by banks to provide relief to borrowers whose income has been hit due to the lockdown.

Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, were shifted across the board by three months.

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The EMI payments will restart only once the moratorium time period expires on 31 August.

The moratorium on interest on working capital was also extended by three months.

Lower rates might induce some of the larger corporates as the group exposure limit has also been increased, says Consulting Editor, ET Now.

India GDP growth in 2020-21 is estimated to remain in negative territory.

Das observed that investment demand has virtually been halted. Assuming economic activity gets restored in a phased manner especially in the second half of this year, and taking into consideration favorable base effects, it is expected that the combination of fiscal, monetary and administrative measures being now undertaken both by the government and the RBI could create conditions for a gradual revival in activity in the second half of 2021.

In the light of the COVID-19 pandemic and the consequent stress on these state government finances, Shaktikanta Das said that RBI has made a decision to relax the rules governing withdrawal from the CSF, while at the same time ensuring that depletion of the fund balance is done prudently. "It is in the growth outlook that the MPC judged the risks to be gravest", Mr Das said.

MPC is of the view that headline inflation in first half of 2020 will be stay intact but by Q3 and Q4 it may fall below the target of 4 percent, said the RBI governor.

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