India’s central bank cuts interest rate to blunt economic impact of Covid-19

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The Reserve Bank of India has undertaken its largest interest rate cut since the global financial crisis of 2008. It is hoped that this will blunt the economic blow inflicted by the Covid-19 pandemic on the emerging economy.

RBI governor Shaktikanta Das announced a 75 basis points (bps) reduction of the banks repo rate to 4.4 per cent, its lowest level in 16 years. Meanwhile, its reverse repo rate was slashed by 90bps to 4 per cent in order to “discourage lenders from depositing money” with the central bank.

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While confirmed cases of the novel coronavirus in India remain relatively low at 874 with 20 deaths, some experts believe that this only reflects the lack of test kits currently available and argue that the actual figure could be much higher.

In order to arrest the spread of the virus Prime Minister Narendra Modi this week announced a 21-day nationwide lockdown. With 1.3 billion Indians told to stay at home the country’s economy has unsurprisingly taken a hammering. Indian stocks suffered their worst day on record at the start of this week, with the NIFTY 50 index down almost 13 per cent and the rupee (INR) hitting a record low on the dollar above 76.

The Indian government has outlined its plan to feed 800 million worse-off Indians in the next three months with a stimulus package worth ₹1.7trn ($22.5bn, £18.1bn).

To further safeguard the Indian economy, the RBI has made the unusual decision of putting loan repayments on hold, announcing a three-month moratorium on the payment of equated monthly instalments (EMIs) on all term loans, including auto, housing and corporate.

The RBI said the easy monetary policy is unlikely to spur inflation, which has been above the central bank’s comfort zone in recent times, that too mainly due to a rise in food prices. However, “due to the uncertain conditions,” Das did not provide any inflation projections.

Justifying such unprecedented measures Das stated: “This kind of uncertain outlook has never been seen before. There is a possibility that large parts of the world will slip into a recession.”

The RBI’s announcement did trigger a short-term surge in Friday trading. However, by the closing bell such any significant gains had diminished with the NIFTY 50 up by just 0.22 per cent and the BSE Sensex down 0.44 per cent.

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