The RBI once again played it by the ear, reducing repo rate by 40 basis points to 4 per cent, besides extending loan moratorium for all retail and commercial borrowers by another three months till August, 31.
The central bank at its emergency MPC meeting that began on Wednesday, in a 5-1 vote split decided to cut rates including reverse repo rate, which now stands at 3.35 per cent, making it least attractive for banks to sit on cash.
With repo rate at 4 per cent, one can expect banks to lower interest rates further, which means home or auto loans will become even cheaper for new customers. Existing borrowers, whose loans are linked to MCLR, however, have to wait until individual banks’ technical advisory committees take a call on rate reduction, while loans linked to external benchmarks could see a quicker correction.
While rate cuts and extension of moratorium are encouraging, the central bank’s read on India’s FY21 GDP hits like a ton of bricks. Going by the high frequency indicators RBI governor Shaktikanta Das concluded that our GDP growth expected to remain in negative category. This confirms economists’ worst fears about India staring at one of its harshest recessions, which could further widen inequality and leave millions unemployed.
Admittedly, the biggest blow came from private consumption, which accounts for over 60 per cent of the GDP. Particularly, consumer durables production plunged 33 per cent in March and could go even lower given the lockdown, which commenced late March.
There will be gradual revival of activity and demand by the second half of FY21, Das reasoned.
As for inflation, prices are likely to remain firm in the first half of 2020 — which is why RBI is maintaining its accommodative stance keeping the door wide open for further rate cuts — but could ease in subsequent months.
Food inflation, which blew hot and cold between January and March has now surged to 8.6 per cent in April with prices of vegetables, oilseeds, and milk bursting at the seams. Though food inflation is currently under pressure, MPC was of the view that headline inflation in first half of 2020 will stay intact, but by Q3 and Q4 it may fall below the target of 4 per cent.
According to Das, a ray of hope emerges from the forecast of normal monsoons with agriculture and allied activities already standing as a beacon of hope for the country.
Meanwhile, to shore up commercial sector, the central bank on Friday allowed the Rs 15,000 crore line of credit for 90 days for US dollar swap facility to EXIM Bank, which will have a rollover facility to upto one year.
Similarly, to provide flexibility for SIDBI, another 90 days extension for the 90-day term loan facilities was offered, which will provide additional liquidity support to the MSME sector.