RBI Cuts Repo Rate By 40 Bps To 4%

RBI Guv during the press conference

Shares of financials including banks, housing finance companies, non-banking finance companies (NBFCs) and microfinance institutions (MFIs) were under pressure, falling up to 8 per cent after the Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC) at its meeting held today made a decision to extend moratorium period by another three months till August 31, 2020.

With the reduction in the repo rate by 40 basis points to 4 percent, it is likely that the savings bank interest rates as well as fixed deposit rates in financial institutions will see a further downward movement.

He said high-frequency indicators point to collapse in demand, and there is a plunge in demand for electricity and petroleum productions.

Headline inflation may remain firm in the first half of the year and may ease in the second half. The central bank set the 25 percent limit in June 2019 and capped lenders' exposure to a single party at 20 percent.

However, agriculture and allied activities have given a beacon of hope for the country, he said. Assuming economic activity gets restored in a phased manner especially in the second half of this year, and taking into consideration favorable base effects, it is expected that the combination of fiscal, monetary and administrative measures being now undertaken both by the government and the RBI could create conditions for a gradual revival in activity in the second half of 2021.

The GDP growth in FY2020-21 is expected to remain in the negative category, with some pick up in the second half, Reserve Bank of India Governor Shaktikanta Das said on May 22.

Meanwhile, the outbreak of Covid-19 has affected the pace of the IBC (Insolvency and Bankruptcy Code) resolution process.

Anuj Puri, Chairman - ANAROCK Property Consultants, said, the RBI's repo rate cut is a welcome move.

Consequently, the reverse repo rate was reduced to 3.35 per cent from 3.75 per cent. "Home loan interest rates have already gone down substantially over the previous year, and are presently at an all-time low averaging between 7.15 percent to 7.8 percent", he said. Moody's cuts India's GDP growth forecast to 2.5%. This makes it a total of six months moratorium on loan EMIs (equated monthly installment) starting from March 1, 2020.

The MPC is 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. He said the MPC had voted to maintain its accommodative stance, implying more rate cuts in the future if need arises.

Besides, CEOs of public sector financial institutions will also be present at the meeting. Moratorium extension was expected, considering the economic activity levels.

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