RBI reduces policy rates to boost liquidity

The Reserve Bank of India, in an off-cycle monetary policy review, announced a further reduction of 40 basis points in repo rate—the rate at which banks borrow from the central bank—and the reverse repo rate—the rate at which it borrows from banks. With the reduction, the repo rate now stands at 4 per cent and reverse repo at 3.35 per cent.

RBI has also extended the moratorium on payment of loans by another three months till August. Earlier, in March, the central bank had announced a three-month moratorium on payment of term loans due between March 1 and May 31.

Predicting a negative growth rate for the current financial year, Shaktikanta Das, RBI Governor, said that the rapid spread of Covid-19 has dented demand and the impact of the subsequent lockdown has been far damaging than anticipated.

While these measures are aimed at boosting liquidity, it is important to ensure that the benefit of this reduction is transmitted to the end users.

The Confederation of Indian Industry (CII), in a statement, said that the slew of measures, aimed at alleviating the stress in financial markets, foreign trade, and state government borrowings, will help in providing the necessary impetus to growth.

“Domestic economic activity has been impacted severely by the lockdown which has extended over the past two months… High-frequency indicators point to a collapse in demand beginning March 2020 across both urban and rural segments,” Das said, adding that the RBI continues to keep a close watch on the situation.

Das reassured industry that the central bank will take all necessary measures to alleviate the pains and challenges arising out of the spread of the disease and the subsequent lockdown. However, he said that the silver lining was the normal monsoon forecast.

“Even though the lockdown may be lifted by end-May with some restrictions, economic activity even in Q2 may remain subdued due to social distancing measures and the temporary shortage of labor. Recovery in economic activity is expected to begin in Q3 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives,” Das said..