India’s central bank cuts benchmark rate to decade-low 4.4%

Darnell Taylor
March 27, 2020

The Reserve Bank of India on Friday cut the benchmark interest rates by 75 basis points to 4.40% in a surprise move that comes amid concerns over economic fallout from the global outbreak of COVID-19. The Reverse Repo Rate has also been slashed by 90 basis points to 4%.

The central bank's Monetary Policy Committee (MPC) which met on March 24, 26 and 27 had a majority of 4-2 towards the favour of a 75 bps repo rate cut.

The committee also cut marginal standing facility and bank rate to 4.65 per cent, from 5.4 per cent earlier. "The reverse repo-rate reduced by 90 basis points to four per cent", Das said at a media briefing in New Delhi.

"To help banks in having more liquidity, Cash Reserve Ratio (CRR) of all banks reduced by 100 basis points to 3% for one year". The step will release 1.37 lakh crore. The repo rate was lowered by 135 basis points in five back-to-back cuts between February-October 2019.

Th central bank also permitted all banks and lending institutions to allow a 3-month moratorium on all loans.

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The RBI has warned lending institutions that rescheduling must not be treated as a change in terms and conditions of loan agreements and that there must not be an asset classification downgrade.

"To address the disruptive force of coronavirus, and to revive growth and to preserve financial stability, a war effort has to be mounted and is being mounted", the governor said. Officials have assured markets that the RBI will provide liquidity - both rupee and foreign exchange - to ensure financial markets function smoothly. The other two measures in the liquidity segment include RBI auction of targeted term repos of up to three years tenor of up to Rs 1 lakh crore and easy overnight borrowing by banks by reducing the statutory liquidity ratio (SLR) requirement in this respect.

"Large sell-offs in markets have intensified pressure". The repo rate is also used to control inflation in the country: the RBI increases the rate to lower inflation. "India has locker down economic activity and financial activity is under severe stress", said Shaktikanta Das. "Need for all stakeholders to fight against the pandemic and banks should do all they can to keep credit flowing. Public should not worry about their deposit in private sector banks, they should not resort to panic withdrawal", Das said.

"Tough times never last, only tough people and tough institutions do", he added. Prime Minister Narendra Modi's government imposed a three-week long nationwide lockdown for its 1.3 billion people, the most far-reaching measure undertaken by any government to check the virus's spread.

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