Reserve Bank of India (RBI) governor Shaktikanta Das announced on Friday extension of loan moratorium by three more months to August 31 due to the financial stress caused by the COVID-19 pandemic. A reduction of repo rate is the signal banks that they can borrow funds at cheaper rates from the RBI and lend deploy those.
Revenues have been impacted severely due to slowdown in economic activity amid COVID-19 outbreak, Das said.
The rate cuts along with the central bank's move to allow borrowers more time to repay loans are expected to provide relief to India's stressed businesses and consumers, many of whom were left disappointed with the fiscal stimulus announced recently. On April 17, it lowered the reverse repo rate 25 basis points to 3.75%. "MPC voted to 5:1 majority to reduce the policy repo rate by 40 basis points from 4.4 to 4 per cent", RBI Governor Shaktikanta Das said on Friday, adding that the GDP growth in India in 2020-21 is estimated to remain in the negative territory. Beyond doubt, repo rate cuts do uplift the sentiments of home buyers even further.
The Union Cabinet headed by Prime Minister Narendra Modi on Wednesday gave its nod for numerous schemes announced as part of "Aatma Nirbhar Bharat Abhiyan" package to prop up the economy reeling under the COVID-19 crisis.
The biggest blow is to private consumption that accounts for 60 per cent of domestic demand, the governor said. Red zones have heavier lockdown restrictions.
Speaking on the condition of the economy, the governor said that there has been a collapse in demand in both urban and rural demand since March 2020.
Headline inflation, he said, "may remain firm in the first half" of this financial year, but should ease in the second half, falling below 4%.
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The central bank refrained from giving a projection for GDP growth for the current financial year, as it stopped at saying GDP growth expected in the "negative territory" with some pick-up in growth impulses from the second half of 2020-21 onwards.
Das said the combined impact of demand compression and supply disruption will depress economic activity in the first half of the April 2020 to March 2021 financial year.
Analysts say the central bank appears deeply concerned about India's growth prospects. Banks have to reset their rates at least once every quarter.
Shaktikanta Das also said that the inflation outlook is highly uncertain.
The RBI will also allow banks a six-month moratorium on payments of instalments on loans.
The rate cuts did little to soothe investor fears, with shares in Mumbai falling nearly two percent Friday. "That should help to prevent an immediate deterioration in bank balance sheets", it said.