Economy

RBI Cuts Interest Rates, Estimates 2020-21 GDP Growth to Stay in 'Negative Territory'

The central bank governor also announced a series of regulatory policy measures, including an extension of an earlier loan moratorium.

New Delhi: The Reserve Bank of India on Friday announced that its monetary policy committee (MPC) had cut key policy rates by 40 basis points, even as central bank governor Shaktikanta Das noted that GDP growth for FY’21 would likely “remain in negative territory”.

According to Das, the MPC met over the last few days and voted with a 5-1 majority to reduce rates.

Consequently, the repo rate, or the rate at which the RBI lends to banks, now stands at a low of 4%. The reverse repo rate stands reduced to 3.35% from 3.75%.

“The recent release of macroeconomic data, that for the first time revealed the damage wrought by COVID-19, brought forward the need for an off-cycle meeting of the monetary policy committee in lieu of the scheduled meeting during June 3 to 5, 2020,” Das said in a speech broadcast over YouTube.

“After extensive discussions, the MPC voted unanimously for a reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target.”

Growth and inflation outlook

The RBI governor also announced a series of regulatory and developmental policy measures to help ease the financial stress caused by COVID-19 by extending an earlier moratorium on loan repayment and improving access to working capital.

On the issue of how growth and inflation dynamics will play out over the year, Das noted that the outlook for the latter was “highly uncertain”.

“Against this backdrop, the MPC assessed that the inflation outlook is highly uncertain. The supply shock to food prices in April may show persistence over the next few months, depending upon the state of lockdown and the time taken to restore supply chains after relaxation. Among the pressure points, the elevated level of pulses inflation is worrisome, and warrants timely and swift supply management interventions, including a reappraisal of import duties,” the governor said.

Also read: Why the Economic Crisis Shouldn’t Become an Opportunity for More GDP Talk

On the issue of growth, the MPC believes the risks are the “gravest”, and that perhaps a gradual revival in activity could be seen in the second half of FY 21.

“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: 2020-21 onwards. 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,” Das noted.

The central bank’s estimation of potentially negative growth for GDP in FY’21 is in sharp contrast to the finance ministry and the chief economic adviser’s projection of 2%-3% growth for the financial year.