RBI Cuts Repo Rate, Extends Moratorium by 3 More Months; Sees FY21 GDP Growth in Negative Territory
Taking cognizance of the lock-down due to coronavirus (COVID-19), the Reserve Bank of India (RBI) on Friday reduced its repo rate (short-term lending) by 40 basis points (bps) to 4.0% in its first monetary policy review for 2020-2021. RBI also allowed banks to extend the three-month moratorium on monthly instalments on all term loans.
With RBI lowering repo rate to 4%, the reverse repo (short-term borrowing) rate now stands reduced to 3.35%, says RBI governor Shaktikanta Das in a video address. Accordingly, the marginal standing facility (MSF) rate and the bank rate stand reduced to 4.25% from 4.65%.
RBI has also decided to extend the moratorium for three more months on all term loans. "All commercial banks, including regional rural banks, small finance banks and local area banks, co-operative banks, all-India financial Institutions, and non-banking finance companies (NBFCs), including housing finance companies and micro-finance institutions are being permitted to allow a moratorium of three more months from 1st June till 31 August 2020 taking the total period of applicability of the measures to six months or between 1st March and 31 August 2020 on payment of instalments in respect of all term loans outstanding," the RBI governor says.
Lending institutions are being permitted to restore the margins for working capital to their original levels by 31 March 2021. Similarly, the measures pertaining to reassessment of working capital cycle are extended up to 31 March 2021.
Additionally, RBI decided to permit lending institutions to convert the accumulated interest on working capital facilities over the total deferment period of six months between 1st March to 31 August 2020 into a funded interest term loan which shall be fully repaid during the course of the current financial year, ending March 2021.
According to the RBI governor, domestic economic activity has been impacted severely by the two months lock-down. He says, "The top six industrialised states that account for about 60% of industrial output are largely in red or orange zones. High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments. Electricity and petroleum products consumption – indicators of day to day demand – have plunged into steep declines."
"The double whammy in terms of losses of both demand and production has, in turn, taken its toll on fiscal revenues. Investment demand has been virtually halted by a decline of 36% in the production of capital goods in March, which was coincident with a contraction of 27% in imports of capital goods in March and 57.5% in April. This is also evident in a fall of 91% in finished steel consumption in April and a 25% shrinkage in cement production in March."
"The biggest blow from COVID-19 has been to private consumption, which accounts for about 60% of domestic demand. The production of consumer durables fell by 33% in March 2020, accompanied by a 16% decline in the output of non-durables. Similar indications are reflected in surveys of the fast-moving consumer goods (FMCG) space," Mr Das, the RBI governor, pointed out.
RBI says, high frequency indicators of service sector activity, such as passenger and commercial vehicle sales, domestic air passenger traffic and foreign tourist arrivals, also experienced sizable contractions in March. The only silver lining was provided by agriculture, with the summer sowing of rice, pulses and oilseeds in the country progressing well, with total area sown under the current kharif season up by 43.5% so far, and the rabi harvest promising to be a bumper as reflected in record procurement, it added.
The RBI governor also cautioned that in FY20-21, the gross domestic product (GPD) growth is expected to remain in negative category with some pick up during second half.
He says, "It is in the growth outlook that the MPC judged the risks to be gravest. The combined impact of demand compression and supply disruption will depress economic activity in the first half of the year. Assuming that economic activity gets restored in a phased manner, especially in the second half of this year, and taking into consideration favourable base effects, it is expected that the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity in the second half of 2020-21."
"Nonetheless, downside risks to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing and lock-downs. Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-21onwards. The end-May 2020 release of NSO on national income should provide greater clarity, enabling more specific projections of GDP growth in terms of both magnitude and direction. Much will depend on how quickly the COVID curve flattens and begins to moderate," Mr Das says.
Turning to the growth outlook, RBI says, economic activity other than agriculture is likely to remain depressed in first quarter (Q1) of FY2020-21 in view of the extended lock-down. "Even though the lock-down 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 labour."
"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. For the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant. On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phased out faster," RBI added,
In a statement, the central bank says, "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. The impact of the shock has been compounded by the interaction of supply disruptions and demand compression. Beyond the destruction of economic and financial activity, livelihood and health are severely affected."
"Even as various measures initiated by the government and the Reserve Bank work to mitigate the adverse impact of the pandemic on the economy, it is necessary to ease financial conditions further. This will facilitate the flow of funds at affordable rates and revive animal spirits. With the inflation outlook remaining benign as lock-down-related supply disruptions are mended, the policy space to address growth concerns needs to be used now rather than later to support the economy, even while maintaining headroom to back up the revival of activity when it takes hold," RBI added.
Earlier, the RBI had announced a special refinance facility of Rs15,000 crore to SIDBI at RBI’s policy repo rate for a period of 90 days for onlending or refinancing. To provide greater flexibility to SIDBI, RBI has now decided to roll over the facility at the end of the 90th day for 90 more days.
All members of the MPC voted for a reduction in the policy repo rate and maintaining the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
Dr Pami Dua, Dr Ravindra H Dholakia, Dr Janak Raj, Dr Michael Debabrata Patra and Mr Das voted for a reduction in the policy repo rate by 40bps, while Dr Chetan Ghate voted for a reduction by 25bps during the MPC meeting.