NEW DELHI – India’s central bank decided to cut its key policy rate in an emergency meeting on Friday amid fears that the economy may contract due to a stringent COVID-19 lockdown that has tapered off business activities and caused a significant drop in consumption.
Reserve Bank of India Governor Shaktikanta Das said the bank reduced the rate at which it lends to commercial banks by 40 basis points to 4% to help economy battle the liquidity crunch. The bank also slashed the reverse repo rate by 40 basis points to 3.35%.
Das said the Indian economy was likely to contract in 2021 as economic activity had stalled due to the nationwide lockdown that has kept the majority of the Indian population indoors since the last week of March.
“The GDP for this fiscal to remain in negative territory,” Das told reporters, forecasting some pickup in the second half of the fiscal year that ends March 31, 2021.
The central bank also decided to extend for another three months the moratorium on term loans that the RBI had proposed earlier.
“The combined impact of demand compression and supply disruptions will depress economic activity in the first half of the year,” Das said.
“Given all the uncertainties, GDP growth in 2021 is expected to remain in the negative territory with some pick-up in growth impulses being seen in H2 2021 onwards,” he added.
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.
“The impact of coronavirus is turning out to be more than expected. GDP growth is estimated to remain in negative territory in 2021,” Das said in a video conference for reporters.
“RBI will continue to be vigilant and will take whatever measures are needed to be taken due to the COVID pandemic.”
Das said the bank’s six-member Monetary Policy Committee (MPC) held an emergency meeting earlier in the day and unanimously 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.”
He said the bank would remain alert to and ensure that inflation remains within the target of 4% within a band of +/- 2%.
This was the second time this year that the central bank had slashed its repo rate in a bid to encourage lending.
Das said that since the MPC last met in March, the global economic activity had remained in a standstill under COVID-19 related lockdowns that has caused a significant slowdown among the key advanced economies of the world.
Experts generally welcomed the move that but also warned that the second rate cut in about two months along with other policy decisions could also mean that the economy may be headed toward a recession.
“The points emphasized by the RBI governor during his press conference today hinted toward the fact that India might be entering into a recession,” said Pranjal Kamra, CEO of Finology, a fintech firm.
He said the bank had tried to address the massive liquidity crunch and drastically tanking demand in the economy in the wake of COVID-19.
Deepthi Mathew, an economist with Geojit Financial Services, said the bank by cutting the rates was aiming to inject more liquidity into the system.
“More importantly, what is needed is to remove the risk averseness as there is substantial liquidity in the banking sector. The rising food inflation rate could be a challenge to the RBI as it is following the inflation target regime,” Mathew said.
The extension of the moratorium would also bring in some relief to the borrowers but it can put pressure on the bank’s balance sheet, he said.
India has registered nearly 120,000 COVID-19 patients and some 3,600 deaths.