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RBI cuts interest rates, extends loan moratorium for three more months as it expects negative growth rate in FY21: Here are details

The RBI has reduced the benchmark repurchase rate by 40 basis points to 4 per cent, the lowest since 2000. The reverse repurchase rate was cut to 3.35 per cent from 3.75 per cent.

On Friday, Reserve Bank of India (RBI) Governor Shaktikanta Das announced various measures, like extending loan moratorium to cutting down interest rates to boost the economy that has slowed down due to the ongoing coronavirus-induced lockdown.

In an unscheduled announcement, the Reserve Bank of India announced a reduction in interest rates to ramp up support for the economy, which is expected to contract for the first time in more than four decades.

RBI cuts interest rates

The Monetary Policy Committee (MPC), which met ahead of its scheduled meeting in June, has unanimously decided to cut the repo rate to support growth. The committee decided to continue with its “accommodative” policy stance and will be easing monetary policy further in coming days to support the financial system.

The RBI has reduced the benchmark repurchase rate by 40 basis points to 4 per cent, the lowest since 2000. The reverse repurchase rate was cut to 3.35 per cent from 3.75 per cent. 

The Marginal Standing Facility (MSF) rate and the Bank rate stand reduced to 4.25 per cent from 4.65 per cent. The MPC, headed by RBI Governor Shaktikanta Das, has last reduced the repo rate on March 27 by 0.75 per cent to 4.14 per cent.

RBI extends loan moratorium

The RBI has extended loan moratorium until August 31, which makes it a six-month moratorium. On March 27, the central bank had permitted all lending institutions to allow a three-month moratorium relief to their borrowers from March 1, 2020, up to May 31, 2020, to ease any debt servicing for borrowers impacted due to coronavirus epidemic. 

The moratorium on interest on working capital was also extended by three months. The RBI Governor announced that the interest accumulated for the six-month moratorium period can be converted into a term loan.

This extension on loan repayment will provide relief to many individuals, especially the self-employed, as they would have found it difficult to repay the part of their loans due to coronavirus lockdown.

Growth rate to be in negative

The RBI Governor also said that India’s GDP growth is estimated to be in negative territory in the fiscal year of 2021. There is a collapse in demand in both urban and rural demand since March 2020, said RBI Governor Shaktikanta Das. He added that there will be a gradual revival of activity and demand by the second half of 2020-21.

“There will be a gradual revival of activity and demand by the second half of FY21. MPC believes it is essential to instil confidence at this point of time,” Das said.

World trade to shrink: RBI

The RBI Governor Shaktikanta Das said the volume of world trade can shrink by 13-32 per cent in 2020, as projected by the World Trade Organisation (WTO) with the “global economy is inexorably headed into a recession”. 

Reportedly, the global manufacturing purchasing managers index (PMI) contracted to an 11-year low in April 2020, while the global services PMI recorded its greatest fall in the history of the index. 

Increase in Foreign Exchange Reserves

In the press conference, the RBI Governor said that India’s foreign exchange reserves have increased by $9.2 billion during 2020-21 from April 1 onwards. The foreign exchange reserves stand at $487 billion till May 15, the Governor said in his press briefing.

Inflation outlook highly uncertain: RBI

The RBI Governor Shaktikanta Das also added that the inflation outlook is highly uncertain due to the outbreak of the coronavirus pandemic. Expressing concern over increasing prices of pulses, the RBI Governor also said there was a need to review import duties to moderate prices.

Headline inflation may remain firm in the first half of the year and may ease in the second half, said Governor while adding that the inflation may fall below 4 per cent in the third or fourth quarter of the current fiscal.

Third presser to address coronavirus lockdown impact on economy

The announcements by the RBI Governor was the third such presser in the last two months to address the slowdown in the economy due to the coronavirus lockdown. The first one was held on March 27 and the second one was on April 17.

In previous announcements, the Reserve Bank had announced several steps to ease the pressure on borrowers, lenders and other entities including mutual funds and has promised to take more initiatives to deal with the developing situation. The RBI Governor had assured everyone that the central bank would do whatever it can to ease financial distress, ensure liquidity in the market and facilitate bank credit flow. 

The RBI has also injected funds totalling 3.2 per cent of GDP into the economy since the February 2020 monetary policy meeting to tackle the liquidity situation.

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