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India Slashes Policy Rate In Surprise Move To Ease Covid-19 Impact

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India's central bank cut its key policy rate for a second time this year in a non-scheduled move on Friday and extended some stimulus measures to reduce the economic impact of the coronavirus or Covid-19, and the consequent lockdown, as it expects the economy to contract this fiscal year.

The Monetary Policy Committee decided to slash the policy repo rate by 40 basis points to 4 percent, the Reserve Bank of India said in a statement.

In March, the bank had cut the repo by 75 basis points.

The marginal standing facility rate and the bank rate were consequently lowered to 4.25 percent and the reverse repo rate was reduced to 3.35 percent. The reverse repo was lowered by 25 basis points in April.

"The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target," RBI Governor Shaktikanta Das said in a video conference.

Capital Economics economist Shilan Shah said the central bank leaving the door open for further loosening and, with the Finance Ministry belatedly showing willingness to provide some support, this reduces the downside risk that the economy falls into a deep slump lasting years.

The latest decision to reduce the key policy rate and to maintain the accommodative policy stance was unanimous. However, there were different views regarding the size of the reduction with five members including Das favoring a 40 basis point cut, while Chetan Ghate sought a smaller 25 basis points.

Policymakers are of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress, the RBI said.

"Beyond the destruction of economic and financial activity, livelihood and health are severely affected," the bank noted.

Das expects growth in 2020-21 to remain in negative territory, with some pick-up in growth impulses from the second half of 2020-21 onwards. The contraction would be the first in four decades.

Elsewhere on Friday, Goldman Sachs reportedly predicted a 5 percent GDP contraction for the 2020-21 fiscal year.

That would be as deep as compared to the deepest recession India has witnessed since 1979, Goldman Sachs economist Prachi Mishra told CNBC.

The central bank also extended a special refinancing facility for small industries for a further 90 days. A voluntary retention route for foreign portfolio investors was extended by additional three months. The RBI also extended some special measures to boost credit for exporters.

Further, the bank had announced several regulatory measures to reduce financial stress that included a three-month moratorium on term loan repayments. These measures were also extended till August 31. The rules applicable for raising debt by state governments were also relaxed.

Despite the several stimulus measures announced by the government and the central bank, there is a need to ease financial conditions further, the RBI said, to facilitate smooth flow of funds and revive markets.

"With the inflation outlook remaining benign as lockdown-related supply disruptions are mended, the policy space to address growth concerns needs to be used now rather than later to support the economy, even while maintaining headroom to back up the revival of activity when it takes hold," the central bank stressed.

ING Economist Prakash Sakpal expects another 25-50 basis points rate cut at the next scheduled meeting in early August, or even earlier if the situation continues to worsen in the months ahead.

The government has extended the lockdown that has been in place for over two months, till May 31 with some relaxations in areas with less number of Covid-19 cases.

The central bank aims to keep headline consumer price inflation at 4 percent within a band of +/- 2 percent. The inflation outlook is highly uncertain, the RBI said.

The bank expects the unusual spike in food inflation to ease in the coming months after supply lines are restored due to gradual relaxation in the lockdown, and also on hopes of a normal monsoon.

While weak demand may put less pressure on core inflation, the persisting supply disruptions cloud the outlook, the bank said.

Global factors such as lower crude prices and financial market volatility combined with domestic elements are set to pull down headline inflation below target in the December and March quarters of 2020-21, the bank said.

On the growth outlook, the RBI assessed that economic activity other than agriculture is set to remain depressed the June quarter due to the lockdown and continue so into the September quarter despite an end to lockdown as measures such as social distancing will remain and there is likely to be temporary shortage of labor.

The central bank expects an economic recovery to begin in the December quarter and gain momentum in the next three months as supply lines return to normalcy and demand revives.

"For the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant," the bank said. "On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phased out faster."

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