India slashes rates in fight against economic fallout of virus

The Reserve Bank of India (RBI) has slashed interest rates, following other central banks that have taken emergency measures to counter the economic fallout from the fast-spreading coronavirus pandemic.

It cut the repurchase agreement rate or repo rate, which is the rate at which the central bank lends to commercial banks, by 75 basis points to 4.4 percent on Friday, exceeding market expectations for a 50 basis point cut. The reverse repo rate was reduced by 90 basis points to 4 percent. 

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

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

“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.”

India announced a 21-day lockdown on Tuesday to curb the spread of the coronavirus after the number of cases rose in the country, leaving millions of workers facing uncertainty.

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 the 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

India’s benchmark 10-year bond yield dropped as low as 5.98 percent in the immediate aftermath of the announcement before rising to 6.07 percent by 11:20am (05:50 GMT). It had closed at 6.22 percent on Thursday.

The country’s blue-chip NSE Nifty 50 index reversed direction and trimmed gains of over 3 percent after the rate cut, to be down by 1 percent.

India‘s retail inflation eased to a two-month low in February, rising 6.58 percent, but remained above the RBI’s target band. However, inflation was below economists’ estimates of 6.8 percent.

Most global central banks, including the United States 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 eurozone country on Thursday, clearing the way for potentially unlimited money-printing as it scaled up its response to the pandemic.