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India Cuts Reverse Repo Rate Amid COVID-19 Lockdown

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India's central bank reduced its reverse repo rate, while retaining the key policy rate and ramped up liquidity measures as economic activity came to a standstill amid nation undergoing a strict lockdown to curb the spread of coronavirus, or COVID-19.

The Reserve Bank of India lowered its reverse repo rate by 25 basis points to 3.75 percent from 4.00 percent, Governor Shaktikanta Das said in an unscheduled press conference on Friday.

The policy repo rate remained unchanged at 4.40 percent. This move would discourage banks from parking excess funds with the central bank and instead lend to the economy.

The central bank had earlier cut its policy rate by 75 basis points and reverse repo rate by 90 basis points in March.

Further, the bank decided to conduct targeted long-term repo operations, or TLTRO, for an aggregate amount of INR 500 billion.

In order to conserve capital, the central bank instructed banks to avoid dividend payouts.

The liquidity coverage ratio for banks was reduced to 80 percent from 100 percent, with immediate effect. This requirement will be gradually restored back in two phases.

With an aim to meet long-term funding needs of the agriculture and rural sectors and small industries along with housing, the RBI will provide INR 500 billion to financial institutions.

The apex bank raised the ways and means advances limit of states by 60 percent so as to help the state governments to undertake COVID-19 containment and mitigation efforts.

The central bank also left the door open for further loosening, although without more help from the Finance Ministry, the situation is likely to get significantly worse, Shilan Shah, an economist at Capital Economics, said.

The announcement was, however, a disappointment for the markets, which expected aggressive easing via unconventional routes such as debt purchases, as well as monetization of the fiscal deficit, Prakash Sakpal, an ING economist said.

Sakpal said he does not consider economic stimulus as strong enough to position the economy for a speedy recovery once the pandemic ends.

In March, consumer price inflation eased to 5.9 percent from 6.6 percent in February.

Governor said inflation could recede even further, barring supply disruption shocks and may even settle well below the target of 4 percent by the second half of 2020-21.

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