March 27, 2020 / 5:16 AM / 2 months ago

Responding to coronavirus crisis, India slashes rates

MUMBAI (Reuters) - The Reserve Bank of India slashed interest rates on Friday, following other central banks that have taken emergency measures to counter the economic fallout from the fast-spreading coronavirus pandemic.

The Reserve Bank of India (RBI) Governor Shaktikanta Das arrives to attend a news conference after a monetary policy review in Mumbai, December 5, 2019. REUTERS/Francis Mascarenhas/Files

The RBI said it has decided to retain its accommodative stance as long as necessary to revive growth and mitigate the impact of coronavirus on the economy, while ensuring that inflation remains within the target.

The six-member monetary policy committee (MPC) met earlier in the week to arrive at the decision.

It cut the repo rate by 75 basis points (bps) to 4.40%, exceeding market expectations for a 50 bps cut. The reverse repo rate was reduced 90 bps to 4%. While the entire committee favoured a cut, they differed on the size and voted in a 4-2 split to cut rates by this quantum.

“The MPC noted that macroeconomic risks both on the demand and supply side brought on by the pandemic could be severe,” Governor Shaktikanta Das said via video conference.

“The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic”.

This was the first time in five years that the RBI has acted outside the scheduled dates for policy meetings. The MPC was originally scheduled to meet in early April. The last time RBI cut rates in an out-of-turn move was in March 2015 following a budget announcement.

“The RBI surpassed expectations by delivering more than what the market had anticipated, and its promise to ‘do whatever it takes’ has come good,” said Rahul Bajoria, India chief economist at Barclays.

The RBI in an unexpected move also cut banks’ cash reserve ratio or the proportion of deposits that banks need to set aside with it as cash by 100 bps to 3%, freeing up additional rupee liquidity for banks to on-lend for a year.


The RBI permitted banks to provide a three-month moratorium on all term loans and said it stands ready to provide necessary liquidity and take all measures essential to preserve financial stability in the domestic economy.

“The RBI has pulled out its bazooka,” said Prithviraj Srinivas, chief economist at Axis Capital.

“It has pulled down the cost of capital through deep policy rate cuts, it has increased the quantity of money through CRR cuts and asset purchases, and more importantly reduced financial stress in the economy through its 3-month moratorium on all term loans as well as working capital”.

The RBI said all financial institutions can provide a three-month deferment on payments of instalments for all term loans that were outstanding as on March 1 while the interest on working capital could also be delayed for the same duration.

These measures would provide a huge relief for individuals as also companies particularly the small and medium sized firms which have been forced to shut operations due to the nationwide lockdown on account of the virus outbreak.

For a factbox on measures announced by the RBI, see:


The benchmark 10-year bond yield dropped as low as 5.98% in the immediate aftermath of the announcement before rising to 6.08% by 1:15 p.m. (0745 GMT). It had closed at 6.22% on Thursday.

India’s blue-chip NSE Nifty 50 index reversed direction and trimmed gains of over 3% after the rate cut, and was down 0.5%.

The markets were likely disappointed due to the absence of any sector specific measures while there was also nothing for mutual funds who have been bearing the brunt of the sharp jump in corporate bond yields.

RBI noted that the duration and spread of the virus would be key in determining its impact on the global and domestic economy and thus the MPC refrained from giving any projections on either growth or inflation at this uncertain time.

“The collapse in crude prices should work towards easing both fuel and core inflation pressures, depending on the level of the pass-through to retail prices,” the RBI said in its statement.

“As a consequence of COVID-19, aggregate demand may weaken and ease core inflation further,” it added.

India’s retail inflation eased to a two-month low in February, rising 6.58%, but remained above the RBI’s target band. However, inflation was below economists’ estimates of 6.80%.

Most global central banks, including the U.S. Federal Reserve, have cut interest rates to battle the impact of the outbreak, while many have also resorted to printing money to prevent their economies from slipping towards recession.

The measures “will help to assuage the markets in these increasingly unsettled times and offer some protection against widespread defaults, even though the actual impact on boosting economic activity may be limited,” said Aditi Nayar, Principal Economist at rating agency ICRA.

Reporting by Swati Bhat; Additional reporting by Nupur Anand and Abhirup Roy; Editing by Euan Rocha & Simon Cameron-Moore

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