RBI ramps up economic support; cuts interest rates, extends loan moratorium

RBI slashes benchmark lending rate by 40 bps

Shiv Kumar
Tribune News Service

Mumbai, May 22

In a surprise move, the Reserve Bank of India (RBI) on Friday slashed key rates even as it forecast a negative GDP growth for the current financial year.

RBI Governor Shaktikanta Das said the repo rate was being slashed by 40 basis points to 4 per cent while the reverse repo rate would also witness a similar cut to 3.35 per cent.

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In his video press conference, Das said the central bank’s Monetary Policy Committee (MPC) had voted to maintain its accommodative stance and that five out of six members voted in favour of a rate cut. The MPC meeting was due to be held next month but was held ahead of schedule, Das said.

The central bank had on March 27 slashed the benchmark interest rate by 75 basis points.

Apart from slashing the benchmark rates, the RBI also extended the moratorium on loans by financial institutions by three more months till August 31.

“Three-month moratorium we have allowed on term loans and working capital we allowed certain relaxations. In view of the extension of the lockdown and continuing disruption on account of Covid-19, these measures are being further extended by another 3 months from June 1 to Aug 31,” Das added.

In his commentary on the country’s economic situation, Das said the economy was witnessing a collapse of demand as suggested by electricity, petroleum products and private consumption data. He further pointed out that government revenues have also been badly impacted. “Private consumption has taken the biggest blow due to the Covid-19 outbreak. Investment demand has halted,” Das said.

The governor said a combination of monetary, fiscal and administrative measures were being undertaken by the central bank and the government would create conditions for a revival of economic activity in the the second half of FY21. “But the downside risks to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing and lockdowns,” he said.

The central bank has predicted GDP growth for FY21 to be in negative territory. Headline inflation, he said, may stay firm in the first half of the financial year and is expected to ease below 4 per cent in the third and fourth quarters of FY21.

Das said the measures announced today can be divided into four categories: to improve the functioning of markets, to support exports and imports, to ease financial stress by giving relief on debt servicing and better access to working capital and to ease financial constraints faced by state governments.

The Group Exposure Limit of banks is being increased from 25 per cent to 30 per cent of eligible capital base for enabling the corporates to meet their funding requirements from banks. The increased limit will be applicable up to 30th June 2021, Das said.

“It has been decided to relax rules governing withdrawal from Consolidated Sinking Fund (CSF) while at the same time, ensuring depletion of the fund balance is done prudently. It will enable states to meet about 45 per cent of redemption of their market borrowings which are due in 2020-21,” Das added.

Following are the highlights of RBI Governor Shaktikanta Das' statement and resolution of the Monetary Policy Committee (MPC):    

 * RBI cuts repo rate by 40 bps to 4 pc

 * Reverse repo rate reduced to 3.35 pc

 * Second sharp reduction in key policy rates in 2 months 

* RBI advances MPC meeting to take key decisions 

* RBI Governor said it is in growth outlook that the MPC judged the risks to be gravest 

* GDP growth in FY21 estimated to remain in negative territory, with some pick-up in H2 

* Top 6 industrialised states accounting for about 60 pc of industrial output largely in red/orange zones 

* High frequency indicators point to collapse in demand beginning in March 

* MPC opined macroeconomic impact of COVID-19 is turning out to be more severe than initially anticipated 

* Various sectors of economy are experiencing acute stress 

* Economic activity other than agriculture likely to remain depressed in Q1 due to lockdown 

* Inflation outlook highly uncertain

 * Moratorium on term loan instalments extended by another 3 months till Aug 31, 2020 

* Lending institutions permitted to allow deferment of interest on working capital facilities till Aug 31 

* RBI decides to extend time for completion of remittances against imports from 6 months to 12 months for imports made before July 31 

* RBI extends a line of credit of Rs 15,000 crore to the EXIM Bank 

* Maximum permissible period of export credit increased to 15 months from 12 months 

* RBI announces measures to improve functioning of markets and market participants 

* Forex reserves increase by USD 9.2 bn in 2020-21 (up to May 15) to USD 487 bn. —PTI 

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