India’s central bank cut its benchmark repo rate for the second time this year and for the 7th time in 15 months at a surprise monetary policy meeting and said it would “continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
The Reserve Bank of India (RBI) cut its repo rate by 40 basis points to 4.0 percent and has now cut it by 115 points this year following the first cut on March 27.
“The recent release of macroeconomic data, that for the first tine revealed the damage wrought by COVID-19, brought forward the need for an off-cycle meeting of the monetary policy committee (MPC) in lieu of the scheduled meeting during June 3-5, 2020,” said RBI Governor Shaktikanta Das.
RBI today also lowered its reverse repo rate by 40 basis points to 3.35 percent and has now cut it by 155 points this year.
At the previous policy meeting on April 17 the repo rate was maintained but the reverse repo rate was cut by 25 basis points to 3.75 percent to encourage banks to deploy a surplus of liquidity in the banking system to businesses following large injections by itself and the government.
“The MPC is of the view that 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” from the lockdown over the past two months, RBI said, adding:
“High frequency indicators point to a collapse in demand beginning March 2020 across both urban and rural segments.”
RBI pointed to a plunge in electricity consumption while investment activity and private consumption have “suffered precipitous declines” that is reflected in a “collapse” in capital goods production and a large retrenchment in the output of consumer durable and non-durables.
Private consumption accounts for some 60 percent of domestic demand and the production of consumer durables fell 33 percent in March and the output of non-durables 16 percent, Das said, adding industrial production shrank close to 17 percent in March, with manufacturing down 21 percent.
India’s exports suffered their worst slump in the last 30 years as the virus paralyzed world proaction and demand, with merchandise exports down 60.3 percent in April and imports contracted 58.6 percent.
Agriculture provides the only silver lining, with summer sowing of rise, pulses and oilseeds progressing well and total area sown up by 43.5 percent in the current season while the winter season promises to be a number year, RBI said.
Even though India’s government may lift the lockdown by the end of May, RBI said economic activity, apart from agriculture, is likely to remain depressed in the first quarter of the current 2020-21 year, which began April 1, and may remain subdued in the second quarter due to social distancing measures and the temporary shortage of labour.
Although there is heightened uncertainty about the duration of the pandemic and how long measures remain in place, RBI expects the economy to begin recovering in the third quarter and then gain momentum in the fourth quarter as supply lines are restored to normalcy and demand gradually revives.
“On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phase out faster,” RBI said.
Economic growth in the current fiscal year is estimated to remain negative.
The outlook for inflation also remains uncertain but the usual spike in food inflation in April is expected to be moderate and the forecast for a normal monsoon season also portends well.
Together with low prices for oil, metals and other industrial raw materials, input costs for domestic firms will remain low and deficient demand will restrain upward pressure on core inflation.
RBI said it expects headline inflation in the third and fourth quarters of 2020-21 to remain below its target of 4.0 percent. In March India’s headline inflation eased to 5.84 percent.
In addition to past rate cuts, injection of liquidity in both rupees and foreign exchange to keep the financial system and markets functioning, RBI today announced additional measures to support exports and imports, improve the functioning of markets, ease financial stress and constraints faced by state governments.
The Reserve Bank of India released the following monetary policy statement and a statement by its governor, Shaktikanta Das:
reduce the policy repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4.0 per cent from 4.40 per cent with immediate effect;
accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25 per cent from 4.65 per cent; and
the reverse repo rate under the LAF stands reduced to 3.35 per cent from 3.75 per cent.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
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