NEW DELHI: The Reserve Bank of India (RBI) on Friday cut repo rate by 40 basis points (bps) to 4% from 4.40% and reverse repo by as much to 3.35% from 3.75%. The bank rate stands reduced to 4.25%. The announcement was made by RBI governor Shaktikanta Das in a 10am TV broadcast. 1 bps is one hundredth of a percentage point.
The decision was taken by the Monetary Policy Committee (MPC) of the central bank today after a three-day long meeting. The MPC was forced to meet ahead of its 3-5 June scheduled meeting as liquidity continued to be tight in the money market, despite the central banks' previous steps of cutting interest rates and various policy measures.
The decision was reached after a 5:1 vote at the MPC meet with Chetan Ghate the lone voice calling for a 25 bps cut. Das said the world economy is headed into a recession.
The MPC decision to cut key interest rates comes after the central bank's previous attempt to make banks increase lending to consumers, non-banking finance companies (NBFCs) and mutual funds (MFs) have failed to make an impact.
Inflation outlook is highly uncertain, the MPC felt, according to Das. Headline inflation could ease later and by Q3 (October-December) and Q4 (January-March) could fall below 4%, its target set earlier. Supply shock to food prices may linger, the MPC felt and called for re-appraisal of import duties.
"Deficient demand may hold down pressures on core inflation (excluding food and fuel), although persisting supply dislocations impart uncertainty to the near term outlook. However, volatility in financial markets could have a bearing on inflation. These factors, combined with favourable base effects, are expected to take effect and pull down headline inflation below target in Q3 and Q4 of 2020-21," Das said in his address.
GDP growth in FY21 is expected to remain in negative territory, Das said, even as he didn't give a growht forecast. Goldman Sachs on 17 May said India’s economy may contract by a huge 45% in the June quarter and the projected 5% fall in GDP for 2020-21 will be deeper compared to all “recessions" India has ever experienced.
"Recovery in economic activity is expected to begin in Q3 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives. For the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant," the governor said.