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India Cuts Key Rates Unexpectedly To Mitigate Covid-19 Economic Impact

rbi 040617 27mar20 lt

India's central bank reduced its key interest rate unexpectedly and unveiled measures to improve liquidity to combat the economic downturn caused by the spread of coronovirus and preserve financial stability.

The Monetary Policy Committee of the Reserve Bank of India voted 4-2 to cut the repo rate by 75 basis points to 4.40 percent, Governor Shaktikanta Das said Friday. Two policymakers sought 50 basis point cut.

Accordingly, the marginal standing facility, or MSF rate and the Bank Rate were reduced to 4.65 percent from 5.40 percent.

Further, widening the liquidity adjustment facility corridor, the central bank trimmed the reverse repo rate by 90 basis points to 4.00 percent.

The purpose of adjusting the corridor was to make it relatively unattractive for banks to park funds with the RBI and instead, use these funds for productive sectors, the governor said.

The bank announced these measures in its seventh bi-monthly monetary policy meeting, which was initially scheduled on March 31, April 1 and 3. "This decision and its advancement has been warranted by the destructive force of the corona virus," the governor said.

"A war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode," Das said.

"Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do," he added.

The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus, or covid-19, on the economy, the bank said in a statement.

In order to improve liquidity, the RBI reduced the cash reserve ratio, the amount that banks should set aside as reserves, by 100 basis points to 3.00 percent.

Further, the central bank will conduct auctions of targeted term repos of up to three years tenor and decided to increase the accommodation under the MSF to 3 percent of the statutory liquidity ratio from 2 percent.

These three measures relating to targeted long term repo operations, CRR and MSF will inject a total liquidity of INR 3.74 trillion into the system.

The Reserve Bank's liquidity injection since the last meeting in February, together with the measures announced today will be equivalent to about 3.2 percent of GDP.

Further, the RBI announced a three-month moratorium on repayment of term loans of all banks and lending institutions, starting March 1.

The central bank refrained from giving specific growth and inflation outlook as these numbers would be heavily contingent on the intensity, spread and duration of covid-19.

The government on Thursday had unveiled an economic stimulus package worth INR 1.7 trillion as the nation faces complete lockdown to contain the spread of covid-19.

Measures were aimed to help low income households, daily wage earners and small businesses, who are more vulnerable to the 21-day lockdown.

The stimulus package equivalent to only 0.7 percent of GDP is small, Shilan Shah, an economist at Capital Economics, said. Much more will be needed to prevent a food crisis for many of the poorest in the near term and, further ahead, to prevent the drastic economic slowdown this year from turning into an outright contraction, the economist added.

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