The Reserve Bank of India (RBI) on Friday announced a 40-basis point repo rate cut in another attempt to spur growth in the Covid-19-battered economy, and unveiled a slew of additional measures including an extension of the moratorium on interest payment on loans for another three months till August 31.
The RBI’s reduction in repo rate–the rate at which it lends short-term funds to banks–is the second this year after the central bank cut the rate by a hefty 75 basis points (bps) on March 27, just as the impact of the pandemic began to be felt across the economy. The latest cut in repo rate brings the benchmark rate down to 4% and is expected to lead to an overall reduction in the lending rates and deposit rates of banks.
RBI governor Shaktikanta Das, who has been a key player in the overall efforts of the authorities to keep the economy afloat as the pandemic derails economic activity across the globe, announced the measures by way of a video address after an off-cycle meeting of the RBI’s Monetary Policy Committee (MPC), which met over May 20-22. The MPC decides on interest rates, and voted 5:1 in favour of the 40 bps rate cut. Consequently, the Marginal Standing Facility (MSF) rate and the Bank rate stand reduced to 4.25% from 4.65%. The reverse repo rate stands reduced to 3.35% from 3.75%.
The MPC also decided to continue with the accommodative stance as long as it is necessary “to revive growth and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target”.
Detailing the impact of the pandemic on the economy, the RBI governor said the nation needed to have faith in India’s resilience and capacity to overcome all odds. Quoting Mahatma Gandhi, Das said: “It is when the horizon is the darkest and human reason is beaten down to the ground that faith shines brightest and comes to our rescue.”
The RBI also announced significant relaxations aimed at easing financial stress for borrowers across the board. In view of the extension of lockdown and the continuing disruptions, the central bank permitted lending institutions to extend the moratorium on term loan instalments by another three months, ending August 31, 2020.
In respect of working capital facilities sanctioned in the form of cash credit/overdraft, the RBI permitted lending institutions to allow a deferment of another three months, to August 31, 2020. Moreover, in an important relaxation, the central bank also allowed lenders to convert the accumulated interest on working capital facilities up to August 31 into a funded interest term loan which will be repayable not later than March 31, 2021, the end of the current fiscal.
Among other measures, the central bank has also allowed a relaxation for banks’ group exposures under the large exposure framework. The exposure limit of a bank to connected counterparties has been raised from the current 25% to 30% of the banks’ eligible capital base as a one-time measure in view of the pandemic, and will be applicable up to June 30, 2021. This is aimed at allowing corporates to access funds from banks without the fear of banks busting their group exposure limits.
The RBI also allowed a further rollover of the ₹15,000 crore special refinance facility for the Small Industries Development Bank of India (SIDBI) for another 90 days. This apart, foreign portfolio investors (FPIs) have also been allowed a further three-month relaxation under the voluntary retention route (VRR). Relaxations have also been given on the export credit front, and a ₹15,000-crore line of credit for EXIM Bank for 90 days with rollover allowed for a maximum of one year.
On the growth outlook, the RBI said economic activity other than agriculture is likely to remain depressed in Q1 of FY21 in view of the extended lockdown. “Even though the lockdown may be lifted by end-May with some restrictions, economic activity even in Q2 may remain subdued due to social distancing measures and the temporary shortage of labour. 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,” the central bank said.
“GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2 of FY21 onwards,” the governor said.
“The MPC is of the view that headline inflation may remain firm in the first half of 2020-21, but should ease in the second half, aided also by favourable base effects. By Q3 and Q4 of FY20-21, it is expected to fall below target. Thus, the MPC’s forward guidance on inflation is directional rather than in terms of levels. Going forward, as and when more data are available, it should be possible to estimate the path of inflation with greater certainty,” Das said.
“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. On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phased out faster,” the RBI added.
While the stock market remained in negative territory despite the announcements – sections of the market were hoping for a restructuring package aimed at specific stressed sectors like aviation, hospitality, and real estate – bankers and experts said the RBI was showing a pro-active approach and could come up with more measures as and when required. Rajnish Kumar, chairman of State Bank of India, the country’s largest lender, said the latest RBI measures would help industry, banks, and the economy, while other bankers said a restructuring for specific sectors could only be considered once cash flows were better analysed for those sectors after the gradual easing of the lockdown.
Calling the latest rate cut a “nimble, off-cycle cut”, Barclays’ chief economist Rahul Bajoria said the RBI “continues to move forward while feeling the stones”.
“Today’s RBI moves are once again measured, and calibrated upon incoming data. The choice to bring forward the policy meeting once again shows the nimble nature of decision making within the RBI, and we believe RBI will continue to remain so. With rates down to 4%, we believe the central bank still has room to cut rates further, and we continue to expect another 50 bps of rate cuts, most likely to be delivered by end-June – early July. This keeps our projection of terminal repo rate at 3.5%, with risks clearly biased towards rates going further lower,” he added.
Kuntal Sur, partner and leader- Financial Risk and Regulation, PwC India, said the RBI’s moves were aimed at reviving growth in the second half of FY21.
“In furtherance of the earlier moratorium measures, the borrowers now get a relief of an additional three months moratorium. The worry that there is a need for immediate repayment once the moratorium ends has also been addressed by the RBI. The leeway given to convert working capital to FITL to be repaid by end of the financial year is also an additional relief measure,” Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co, said.
Anuj Puri, chairman of Anarock Property Consultants, said: “Beyond doubt, repo rate cuts do uplift the sentiments of homebuyers even further. Home loan interest rates have already gone down substantially over the last year, and are presently at an all-time low averaging between 7.15% to 7.8%.”
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