RBI trims interest rates, says India’s GDP will contract in FY21


In a new set of measures to trim the impact of coronavirus on the economy, the Reserve Bank of India (RBI) on Friday decided to cut the policy rate by 40 basis points from 4.4 per cent to 4 per cent.

The reverse repo rate has been reduced to 3.35 per cent. It has also extended the moratorium on loan repayments by three more months.

“RBI’s Monetary Policy Committee met again from May 20-22. MPC voted to 5:1 majority to reduce the policy repo rate by 40 basis points from 4.4 to 4 per cent,” RBI Governor Shaktikanta Das said on Friday, adding that the GDP growth in India in 2020-21 is estimated to remain in the negative territory.

“India is seeing a collapse of demand. Private consumption has seen the biggest blow due to the Covid-19 outbreak, investment demand has halted. The government revenues have been impacted severely due to slowdown in economic activity,” said the governor.

However, he said that the combination of fiscal, monetary, and administrative actions will create conditions for the revival of the economy in the second half of FY21.

“A ray of hope comes from normal south-west monsoon. By May 10, 2020, kharif sowing was higher by 44 per cent compared to the last year. Rabi procurement in full flow benefiting the bumper harvest. Will support farm income,” Das said.

Other key takeaways:

  • RBI to roll over Rs 15,000-crore refinance facility for SIDBI for 90 days
  • RBI increases export credit period to 15 months from 1 year
  • RBI to extend Rs 15,000-cr line of credit to EXIM Banker 
  • Inflation forecasting has become complicated due to (poor) data collection:
  • Industrial production shrank by close to 17 per cent in March with manufacturing activity down by 21 per cent
  • Output of core industries contracted by 6.5 per cent

Earlier, the RBI governor had announced several measures to ease liquidity pressure in the banking system and to boost the economy from the coronavirus shock, including a sharp 75 basis points rate cut in March.The RBI had also announced a three month moratorium for all term loan repayments between March 1 and May 31.

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