Announcing the decisions taken by the RBI’s Monetary Policy Committee (MPC) — that met ahead of its scheduled meeting in early June — RBI governor Shaktikanta Das unveiled a 40 basis points cut in the benchmark repurchase (repo) rate to 4 per cent. Consequently, the reverse repo rate was also reduced to 3.35 per cent from 3.75 per cent.
Banks are now expected to pass on these benefits to the consumers.
“After extensive discussions, the MPC voted unanimously for a reduction in policy repo rate and for maintaining the accommodative stance of the monetary policy as long as necessary to revive growth and to mitigate the impact of COVID-19 while ensuring that inflation remains within the target,” Das said.
This is the second straight cut in interest rates in the last two months. On March 27, the RBI had cut interest rates by 75 basis points from 5.15 per cent to 4.4 per cent. Following this, banks had also reduced their lending and deposit rates.
In addition, in a much needed relief to borrowers, the RBI extended the moratorium period on payment of all term loans by another three months, that is, from June 1 till August 31. The EMI payments will restart once the period expires on August 31.
The central bank had earlier allowed a three-month moratorium on payment of all term loans due between March 1, 2020, and May 31, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, were shifted across the board by three months.
It also extended the moratorium on working capital loans by three months. Das said that the interest accumulated for the six-month moratorium period can be converted into a term loan.
Further, in its first official forecast for economic growth, the central bank said the gross domestic product (GDP) is likely to contract in FY21 (April 2020 to March 2021). It had earlier refrained from providing any outlook or projections on growth.
“The combined impact of demand compression and supply disruptions will depress economic activity in the first half of the year,” Das said.
He also said that there is a need to review import duties to moderate prices.
Headline inflation may remain firm in the first half of the year and may ease in the second half. Inflation may fall below 4 per cent in the third or fourth quarter of the current fiscal, the governor noted.
He further said that the inflation outlook is highly uncertain due to the pandemic and expressed concern over elevated prices of pulses.
Das also highlighted rising food price pressures from supply disruptions but said the MPC expects inflation to eventually fall below its medium-term target of 4% later in the year.
“If the inflation trajectory evolves as expected, more space will open up to address the risks to growth,” Das said.
(With agency inputs)