India cuts key rates in surprise move to ease coronavirus shock

Andrew Cummings
May 22, 2020

The World Bank and the International Monetary Fund earlier projected disappointing growth for India, saying that the nation's GDP could fall to between 1.5 percent and 1.9 percent this fiscal year, which began in April and will end in March 2021.

The Reserve Bank of India (RBI) has slashed its growth forecast for this financial year and warned of inflation uncertainties as the country's economy suffers due to the Covid-19 pandemic.

These include a Rs 3 lakh crore economic package for micro, small and medium enterprises (MSMEs), Rs 75,000 crore of loans to NBFCs (of which Rs 30,000 crore is a three-month loan scheme fully backed by the government), Rs 5,000 crore for street vendors and Rs 2 lakh crore concessional credit to farmers. The biggest blow was to the private consumption slump with consumer durables production falling 33 percent.

MPC is of the view that headline inflation in first half of 2020 will be stay intact but by Q3 and Q4 it may fall below the target of 4 percent. The RBI has also announced a three-month moratorium for all term loan repayments between March 1 and May 31.

Niranjan Hiranandani, President, Assocham and NAREDCO, said: "There has been a total collapse in demand in both urban and rural India since March 2020". But I do think that there will be some pick up in lending; perhaps not very happily on the part of the banks but the fact that the interest rates have come down might induce some of the larger corporates particularly now that the group exposure limit has also been increased.

Das said the global economy was headed towards a recession because of coronavirus-induced disruptions to supply chains. Further, Das said government revenues have been impacted severely due to the slowdown in economic activity amid the pandemic. This makes it a six month moratorium. "The top 6 industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones", RBI governor Shaktikanta Das said.

The move is a major booster shot aiming to cushion the impact of Covid-19 on the Indian economy. "Home loan interest rates have already gone down substantially over the a year ago, and are presently at an all-time low averaging between 7.15 percent to 7.8 percent", he said.

Naveen Kulkarni, Chief Investment Officer, Axis Securities, said, "The rate cut announced today will have limited impact in the short term, but it is helpful to revive growth over the longer term". Industries have been demanding extension of the moratorium facility for another three months.

Besides, CEOs of public sector financial institutions will also be present at the meeting. Lowering the cost of capital is some relief in these times.

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