RBI predicts economy to shrink, cuts key rate
The Monetary Policy Committee of the Reserve Bank of India (RBI) cut the policy rate by 40 basis points to 4.0% on Friday, acknowledging the adverse impact on the Indian economy of the coronavirus disease (Covid-19) and the lockdown imposed to combat its spread.
A basis point is one-hundredth of a percentage point. RBI has so far cut its policy rate by 115 basis points since the crisis began to a historic low.
RBI governor Shaktikanta Das also extended the moratorium on payment of term loans (this includes mortgages or housing loans taken out by individuals, even personal loans) by another three months to August 31.
The moves are expected to make loans cheaper, and give borrowers a break from monthly loan repayments at a time when they are financially stressed. The interest for these six months will be treated as a loan that will have to be paid by the end of this financial year (March 31).
Interestingly, Das admitted that growth will be in “negative territory” this year, the first time anyone in the government or the central bank has admitted that India’s gross domestic product (GDP) will shrink this year.
Chief economic advisor Krishnamurthy Subramanian has maintained that GDP growth will be 1-2% this year and the International Monetary Fund predicted, on April 14, that India would grow by 1.9%. Goldman Sachs on Sunday said it expected India’s economy to contract 45% on an annualised basis in the quarter ending June, and by 5% in the financial year.
“The end-May 2020 release of NSO [National Statistical Office] on national income should provide greater clarity, enabling more specific projections of GDP growth in terms of both magnitude and direction,” Das said.
Das announced the cut, and other measures aimed at keeping “financial markets working, ensuring access to funds to everyone, and preserving financial stability” in a digital video address on Friday, his third since the lockdown began on March 25.
Stock-market investors weren’t impressed but bonds rallied. The Bombay Stock Exchange’s benchmark Sensex fell 0.84% to 30,672.59 points at the close of trading.The yield on the most-traded 2029 bonds dropped seven basis points to 5.96% at the close after falling more than 15 points intraday, while that on the new 10-year notes slid three basis points, Bloomberg reported. Bond prices and yields move in opposite directions. The rupee fell 0.5% to 75.9650 per dollar.
Das said that the economy has been hit hard by a collapse in demand and disruption in supply. Private consumption has fallen sharply, he added. But India’s foreign exchange reserves remain $487 billion, the governor said — an indication that the country is unlikely to face a crisis of the nature it did in 1991 when this was down sharply and barely adequate to fund a few days of imports. The current reserve is adequate to fund a year of imports, Das said.
India’s central bank has previously announced measures to tackle the economic crisis resulting from the pandemic (and the lockdown) on March 27 and April 17. According to the government, around ~8.01 lakh crore crore of the ~20 lakh crore Atmanirbhar Bharat Abhiyan (Self-Reliant India Campaign) announced by the government through last week is accounted for by monetary measures of the RBI.
On Thursday, the central bank announced measures aimed at improving the functioning of markets, to support exports and imports (the first is down by 60% in April and the second by 58%, the governor pointed out), to ease financial stress, and to help state governments financially. These include exemptions from borrowers being classified as defaulters and the loans as non-performing assets for another three months, and an extension of the timeline for resolution of bad loans.
The governor admitted that inflation in pulses, milk and vegetable oil has accelerated, primarily because of supply disruption, but added that the monetary policy committee expects this to ease in a few months, although he cautioned that early remedial measures may be needed in the case of pulses. Growth, he added, remains the bigger concern, and while the second half of the financial year could see some “growth impulses”, much would depend on how the pandemic plays out.
Das reassured markets that as inflation comes out, it would open up room for RBI to do even more.
When the “chips are down”, everyone, everywhere in the world turns to the central bank, Das said.
RBI “remains vigilant”, he said, to “use all its instruments and even fashion new ones to address “the dynamics of an unknown future”.
Two government officials, requesting anonymity, said the finance ministry may persuade public sector banks (PSBs) to quickly transmit the rate cut to borrowers. Lower EMIs for purchasing apartments and automobiles would boost demand. “Raising consumption through lower EMIs is one of the strategies of the government to boost growth,” one of the officials said.
Niranjan Hiranandani, president of the Associated Chambers of Commerce and Industry of India (Assocham), said: “There has been a total collapse in demand in both urban and rural India since March 2020. The continued proactive measures taken by RBI will help address these issues and revive the economy in the second half of the year.”
Federation of Indian Export Organisations (FIEO) president Sharad Kumar Saraf said the RBI measures would provide “a much needed respite” to the industry.
The measures announced by the central bank would “definitely reduce pressure on cash flows and liquidity for entities”, said Rajosik Banerjee, partner and head of the financial risk management practice at KPMG India.
Mihir Vora, director and chief investment officer at Max Life Insurance, cautioned that credit risk-aversion in the financial markets may persist; high-rated borrowers will continue to get easy funding and lower-rated entities struggle to raise funds.
“More direct fiscal support to businesses, workers and stressed segments will be needed to, 1) contain job losses, 2) stimulate the demand-side of the economy, 3) encourage private sector investments to counter the demand shock due to the domestic lockdown and fall in exports,” Vora said.