The Reserve Bank of India (RBI), today, unexpectedly slashed repo rate by 40 basis points for a second time this year. The short-term lending rate now stands at 4% down from 4.4%. Earlier this year on 27 March, the RBI had slashed the policy repo rate by 75 basis points to 4.4%. The reverse repo rate too was also reduced by 40 basis points to 3.35%. On 17 April this year, the RBI had cut the reverse repo rate by 25 bps from 4% to 3.75% to discourage banks from deploying surplus funds with it.
"The MPC is of the view that that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated. Beyond the destruction of economic and financial activity, livelihood and health are severely affected. Judging that the risks to growth are acute, while the risks to inflation are likely to be short-lived, the MPC believes that it is essential now to instil confidence and ease financial conditions further. This will facilitate the flow of funds at affordable rates and rekindle investment impulses," reasoned Shaktikanta Das, Governor of RBI. He further added that if the inflation trajectory evolves as expected, more space will open up to address the risks to growth.
Domestic economic activity has been impacted severely by the two-month lockdown, said Das. He added that the biggest blow from COVID -19 has been to private consumption, which accounts for about 60% of domestic demand. On the inflation aspect he added that food inflation which had eased has suddenly reversed and surged to 8.6% in April owing to supply disruptions. Stating that the inflation outlook is highly uncertain, RBI expects the supply shock to food prices in April to show persistence over the next few months, depending upon the state of lockdown and the time taken to restore supply chains after relaxation.
On growth prospects, the MPC believes that the combined impact of demand compression and supply disruption will depress economic activity in the first half of the year. RBI expects that the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity in the second half of 2020-21. "Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-21 onwards," said Das. He added that much will depend on how quickly the COVID curve flattens and begins to moderate.
So as to ease the financial stress, the RBI had on 27 March and 17 April 2020, announced regulatory measures such as (a) granting of 3 months moratorium on term loan instalments; (b) deferment of interest for 3 months on working capital facilities; (c) easing of working capital financing requirements by reducing margins or reassessment of working capital cycle; (d) exemption from being classified as ‘defaulter’ in supervisory reporting and reporting to credit information companies; (e) extension of resolution timelines for stressed assets; and (f) asset classification standstill by excluding the moratorium period of 3 months, etc, by lending institutions. In view of the extension of the lockdown and continuing disruptions on account of COVID-19, the RBI announced that the above measures are being extended by another three months from 1June 2020 till 31 August 2020.
"The rate cuts combined with the further extension of loan moratoriums by 3 months up to 31 August 2020 augurs well for the real estate sector in the times to come," remarked Anuj Puri, chairman, Anarock Property Consultants. He added that today’s repo rate cut will further help banks to lower home loan interest rates, which may get several more fence-sitters onto the market. "Moreover, the repo rate cut may compel banks to reduce the interest rates for FDs even further - this could result in even more people leaning towards housing as a better investment option," he said.