The Reserve Bank of India (RBI) further reduced the key interest rate or the repo rate by 40 bps on Friday, after a yet another out-of-turn Monetary Policy Committee (MPC) meeting as the COVID-19 pandemic induced lockdown continues, albeit with calibrated relaxations.
The central bank also extended the loan repayment moratorium for another three months till August 31.
The six-member MPC announcement has reduced the repo rate to 4% with five members of the panel voting for the steep cut while one member, Chetan Ghate, voted for a 25 bps cut.
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, RBI said.
RBI Governor Shaktikanta Das termed the risk to growth outlook “gravest”.
“Domestic economic activity has been impacted severely by the two-month lockdown. The top six industrialised States that account for about 60% of industrial output are largely in red or orange zones,” Mr. Das said.
“High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments,” he added.
The central bank refrained from giving a projection for GDP growth for the current financial year and stopped at saying that growth expected in the “negative territory” with some pick-up in growth impulses from the second half of 2020-21 onwards. “It is in the growth outlook that the MPC judged the risks to be gravest,” Mr Das said.
Inflation target has also been held back by the central bank.
“The MPC is of the view that headline inflation may remain firm in the first half of 2020-21, but should ease in the second half, aided also by favourable base effects,” Mr Das said.
“By Q3 and Q4 of FY20-21, it is expected to fall below target. Thus, the MPC’s forward guidance on inflation is directional rather than in terms of levels. Going forward, as and when more data are available, it should be possible to estimate the path of inflation with greater certainty,” he added.
Since February last year, the RBI has reduced the policy repo rate by a cumulative 250 bps, from 6.5% to 4%.
And there could be further scope for a rate cut if the inflation trajectory evolves as expected RBI said.
The central bank also extended the loan repayment moratorium for another three months, till August 31. All other conditions for the facility remain unchanged — a loan will not be classified by the lender as non-performing and there will not be any impact on individual credit scores. In addition, interest payment deferment for working capital loans has also been extended by another six months.
RBI has also decided to increase the group exposure limit of banks from 25% to 30% of its capital base. The regulator said the decision was taken to facilitate flow of resources to the companies as many of them were unable to raise funds from capital markets and are predominantly dependent on funding from banks.
A liquidity facility for Exim Bank of India was also opened as it has been decided to extend a ₹15,000 crore line of credit for a period of 90 days to enable it to avail a U.S. dollar swap facility to meet its foreign exchange requirements.
Also to alleviate difficulties being faced by exporters in their production and realisation cycles, it has been decided to increase the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to 15 months, for disbursements made up to July 31, 2020.
“Uncertainty associated with pandemic, normalisation of economic activity and relaxation made in social distance makes it imperative that policy response is calibrated and swift,” SBI chairman Rajnish Kumar said.
“In this context, extension of moratorium till August 31, enlargement of the Large Exposure Framework and option to convert accumulated interest for moratorium period into term loan are welcome measures. On the export side, increase in export credit period to 15 months from 1 year and buttressing EXIM Bank through ₹15,000-cr line of credit is also timely,” he added.