Responding to coronavirus crisis, India slashes rates

Responding to coronavirus crisis, India slashes rates

MUMBAI — The Reserve Bank of India slashed interest rates on Friday, following other central banks that have taken emergency measures to counter the economic fallout from the fast-spreading coronavirus pandemic.

The RBI said it has decided to retain its accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus on the economy, while ensuring that inflation remains within the target.

The six-member monetary policy committee (MPC) met earlier in the week to arrive at the decision.

It cut the repo rate by 75 basis points to 4.40%, exceeding market expectations for a 50 basis point cut. The reverse repo rate was reduced 90 basis points to 4%. While the entire committee favored a cut, they differed on the size of the cut, and voted in a 4-2 split to cut rates by this quantum, the RBI said.

“The MPC noted that macroeconomic risks both on the demand and supply side brought on by the pandemic could be severe,” Governor Shaktikanta Das said via video conference.

“The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic.”

This was the first time in five years that the RBI has acted outside the scheduled dates for policy meetings. The MPC was originally scheduled to meet in early April. The last time RBI cut rates in an out-of-turn move was in March 2015 following a budget announcement.

The RBI also permitted banks to provide a three-month moratorium on all term loans and said it stands ready to provide necessary liquidity and take all measures essential to preserve financial stability in the domestic economy.

MARKETS YO-YO

The benchmark 10-year bond yield dropped as low as 5.98% in the immediate aftermath of the announcement before rising to 6.07% by 11:20 a.m. (0550 GMT). It had closed at 6.22% on Thursday.

India’s blue-chip NSE Nifty 50 index reversed direction and trimmed gains of over 3% after the rate cut to be down 1%.

India’s retail inflation eased to a two-month low in February, rising 6.58%, but remained above the RBI’s target band. However, inflation was below economists’ estimates of 6.80%.

Most global central banks, including the U.S. Federal Reserve, have cut interest rates to battle the impact of the COVID-19 outbreak, while many have also resorted to printing money to prevent their economies from slipping towards recession.

The European Central Bank ditched a cap on how many bonds it can buy from any single euro zone country on Thursday, clearing the way for potentially unlimited money-printing as it scaled up its response to the pandemic. (Reporting by Swati Bhat; Editing by Euan Rocha & Simon Cameron-Moore)

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