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Home / Business News / India cuts rate to lowest since 2000 to revive shrinking GDP

India cuts rate to lowest since 2000 to revive shrinking GDP

The central bank expects the economy to contract in the fiscal year through March 2021 as the impact of the coronavirus and measures taken to contain the pandemic severely affect domestic activity.

business Updated: May 22, 2020 13:47 IST
Bloomberg | Posted by: Shivani Kumar
Bloomberg | Posted by: Shivani Kumar
The reverse repurchase rate was cut to 3.35 per cent from 3.75 per cent.
The reverse repurchase rate was cut to 3.35 per cent from 3.75 per cent.(Bloomberg)

India’s central bank cut interest rates in an unscheduled announcement on Friday, ramping up support for an economy it expects will contract for the first time in more than four decades.

Governor Shaktikanta Das reduced the benchmark repurchase rate by 40 basis points to 4 per cent, the lowest since 2000, when the measure was introduced. The reverse repurchase rate was cut to 3.35 per cent from 3.75 per cent. The monetary policy committee, which met ahead of its scheduled meeting in early June, kept its “accommodative” stance, implying it could ease further.

“Going forward, we will continue to be vigilant and we will take whatever measures are necessary to meet the Covid-related challenges which are ahead of us,” Das said. “The RBI will continue to remain vigilant and in battle readiness to use all its instruments and even fashion new ones, as recent experience has demonstrated, to address dynamics of the unknown future.”

The central bank expects the economy to contract in the fiscal year through March 2021 as the impact of the coronavirus and measures taken to contain the pandemic severely affect domestic activity.

The yield on the most-traded 2029 bonds fell 14 basis points to 5.89 per cent, while that on the new 10-year notes dropped nine basispoints to 5.68 per cent. The rupee weakened and the S&P BSE Sensex indexerased gains of as much as 0.6 per cent to halt a three-day rally.

“The off-cycle move may have caught the markets off-guard, but it shouldn’t be a total surprise given recent dismal activity indicators,” said Prakash Sakpal, an economist at ING Groep NV in Singapore. “GDP is headed for a sharp contraction, as much as 5 per cent year-on-year on my estimate, in the current quarter.”

Das also outlined the following measures:

The RBI last cut its benchmark rate on March 27 following an emergency policy meeting. Das said at the time that the RBI will continue to remain vigilant and would not hesitate to use any instrument -- conventional and unconventional -- to mitigate the economic fallout of the virus and preserve financial stability.

“With the realization that growth will be negative this fiscal year, the monetary panel” brought forward the rate said Manish Wadhawan, founder at Serenity Macro Partners. “With limited space for fiscal expansion, the central bank will have to do the heavy lifting.”

The economy is heading for a 45 per cent contraction in GDP in the quarter through June, according to Goldman Sachs Group Inc., and facing a full-year decline as consumption -- the backbone of the economy -- collapsed due to the government’s strict stay-at-home measures.

High frequency data has showed that demand is virtually non-existent. India’s dominant services industries crashed last month, while car sales also collapsed. Large swathes of the population have been left destitute, with an estimated 122 million people losing their jobs in April, many of them daily wage earners, a survey by the private sector Center for Monitoring Indian Economy showed.

(Updates with comment from governor in fourth paragraph.)

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