Mumbai: The Reserve Bank of India on Friday unexpectedly slashed benchmark interest rates to their lowest levels since 2000 and extended the moratorium on repayment of bank loans for three months to ramp up support for the economy which is likely to contract for the first time in over four decades.
The central bank, which advanced the monetary policy committee meeting for the second time since March, extended the three-month moratorium of loan repayments, from June 1 to August 31 and raised the limit on banks’ group exposure to companies.
It also increased and pre and post-shipment of credits for exports from one year to 15 months and gave additional three months to foreign portfolio investors to meet investment needs.
The benchmark repurchase (repo) rate was cut by 40 basis points to 4 per cent, the lowest since the benchmark came into being in 2000, Governor Shaktikanta Das said.
Consequently, the reverse repo rate was cut to 3.35 per cent from 3.75 per cent.
The benchmark rates decide the interest on home, auto and other loans. They also dictate interest rates on savings deposits, which are likely to fall in tandem.
The Governor said the MPC had voted to maintain its accommodative stance, implying more rate cuts in the future if the need arises.
In its first official forecast for economic growth, the central bank said the gross domestic product is likely to contract in FY21 (April 2020 to March 2021) as a direct fallout of the outbreak of coronavirus and ensuing lockdown.
Even before the coronavirus outbreak, the Indian economy was experiencing a slowdown, with GDP growth declining to a projected 4.9 per cent in 2019-20 fiscal, its slowest pace in the
“The macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress,” RBI said, adding that beyond the destruction of economic and financial activity, livelihood and health are severely affected.
Das said the combined impact of demand compression and supply disruptions will depress economic activity in the first half of the year, with some pickup in growth impulses being seen in H2 2021 onwards.
India has been under lockdown since March 25 to contain the spread of the virus, resulting in supply disruptions and demand compression.
Das said domestic economic activity has been impacted severely by the lockdown that has been extended till May 31.
“High-frequency indicators point to a collapse in demand beginning March 2020 across both urban and rural segments,” he said.
Supplementing government’s COVID-19 stimulus that mostly comprised of credit lines to small business and farmers, RBI said it will facilitate the flow of funds at affordable rates and revive animal spirits.