RBI slashes interest rate by 75 bps, permits freeze on EMI payments to fight corona fallout

Mumbai/New Delhi: The Reserve Bank of India (RBI) decided on a sharp cut in key policy rates on Friday, seeking to spur faltering economic growth in the aftermath

Mumbai/New Delhi: The Reserve Bank of India (RBI) decided on a sharp cut in key policy rates on Friday, seeking to spur faltering economic growth in the aftermath of the coronavirus pandemic, and announced a moratorium on loan repayments by individuals and entrepreneurs to provide immediate relief to borrowers.

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The key repo rate, at which the central bank infuses liquidity in the banking system, was cut by 75 basis points to 4.4% and the reverse repo rate, at which it drains excess liquidity from the system, reduced by 90 basis points to 4% to revive economic growth. It is the first cut in policy rates since December. One basis point is one-hundredth of a percentage point.The Cash Reserve Ratio, the amount of deposits lenders must set aside as reserves, was lowered by 100 basis points to 3%.

The RBI’s monetary policy committee (MPC), which was to meet in early April, advanced the meeting to announce the package welcomed by both the government and financial markets. The last time the RBI cut rates out of turn was in March 2015. The entire committee voted for a cut, but were split 4-2 on the extent of the cut.

“The MPC noted that macroeconomic risks both on the demand and supply side brought on by the pandemic could be severe,” RBI Governor Shaktikanta Das said. “The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic.”

Das said RBI allowed banks, non-banking financial companies, including housing financiers and other financial institutions to allow a three-month moratorium on payment of instalments on term loans amid the disruption caused the coronavirus outbreak. Governor Das said the deferment will have no adverse impact on the credit history of the borrower.

The three-month moratorium allowed by RBI will help borrowers in easing the burden on their savings and avoid turning defaulters, and was announced a day after finance minister Nirmala Sitharaman unveiled a Rs. 1.7 lakh crore package including additional food transfers at no additional cost, cash for vulnerable segments and support for those in the frontline of the battle against the pandemic.

“Today@RBI has taken giant steps to safeguard our economy from the coronavirus,” Prime Minister Narendra Modi said in a Twitter post.The announcement will boost liquidity, reduce the cost of funds, help middle class and businesses.” Union finance minister Nirmala Sitharaman tweeted to say the measures announced by RBI would offer “much-desired relief” to borrowers.

RBI also allowed banks to restructure the working capital cycle for companies without worrying that these will have to be classified as non-performing assets (NPAs) during the 21-day countrywide lockdown.

India’s economy, Asia’s third largest, had been slowing even before the onset of Covid-19 in the Chinese city of Wuhan late last year and its rapid global spread year. The budget for the 2020-21 fiscal year presented on February 1 had estimated that the economy would grow 6% in the fiscal year ending March 31, the slowest pace in 11 years.

Governor Das said India will struggle to achieve its fiscal fourth-quarter economic growth forecast of 4.7% in the aftermath of the coronavirus outbreak. He added that India needed conventional and non-conventional measures to tackle the unprecedented situation, depending on the spread, intensity and duration of the outbreak.

The Governor said since the last MPC meeting of February 2020, the central bank has injected liquidity equivalent to about 3.2% of GDP.

“There is a huge increase in potential liquidity in the system, but the real question is what do we expect on the demand side,” said economist Pronab Sen, a former chief statistician of India. “Assumption is that there is a repressed demand for credit.”

The rupee and bonds rallied after the measures. The rupee jumped as much as 1.1% to 74.3625 to the dollar in the afternoon. The yield on 10-year bonds fell as much as 24 basis points to 5.98%, the lowest since 2009. Bond yields and prices move in opposite direction. Sovereign bonds have collapsed and the rupee fell to a record low because of the coronavirus crisis.

Stocks soared as investors cheered the package of measures announced by the RBI, but came off their highs. After rising to a day’s high of 31,126 points, the BSE’s benchmark Sensex gave up much of its gains and ended at 29,815.59 points, a fall of 131.18 points, or 0.44%. The National Stock Exchange’s Nifty regained the 9,000 level, rising as high as 9,038.90 points, but ended 8,660.25 points, or 0.22%, up by 18.80 points.

“The RBI has broadly delivered on the whole set of wish lists of the bond markets,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi. “These measures should make a meaningful and substantial impact on short-dated corporate bonds and in general on the whole credit curve.”

RBI’s steps included targeted long-term repo operations of up to three years for a total of up to Rs.1 lakh crore Banks will be able to invest in instruments including investment grade corporate bonds, a move aimed at cooling down short-term yields. RBI has been criticised by some sections for being behind the curve at a time when central banks worldwide moved to swiftly reduce borrowing costs to sheld their economies.

“The RBI has now put to rest the concern that it was failing to appreciate the required pivot to emergency conditions,” Suyash Choudhary, head of fixed income at IDFC Asset Management Co., wrote in emailed comments.

(Reuters and Bloomberg contributed to this story)