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Mumbai, March 27, 2020
The Reserve Bank of India (RBI) today reduced the policy repo rate under the liquidity adjustment facility (LAF) by 75 basis points to 4.40 per cent from 5.15 per cent with immediate effect in order to minimise the adverse macro-economic impact of the coronavirus (COVID-19) pandemic that has hit the world.
In its Seventh Bi-monthly Monetary Policy Statement, 2019-20, on the basis of a resolution of its Monetary Policy Committee (MPC), the RBI said it was of the view that macro-economic risks brought on by the pandemic could be severe and the need of the hour was to do whatever is necessary to shield the domestic econmy from its impact.
At a meeting of its Monetary Policy Committee (MPC) today, the RBI also reduced the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent from 5.40 per cent.
Further, consequent upon the widening of the LAF corridor, as detailed in an accompanying Statement on Developmental and Regulatory Polices, the reverse repo rate under the LAF has been reduced by 90 basis points to 4.0 per cent, the central bank said in its Seventh Bi-monthly Monetary Policy Statement, 2019-20 on the basis of the resolution of the MPC.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy, while ensuring that inflation remains within the target.
"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," the statement said.
Today's move by the RBI has come at a time when the outbreak, which began in December in China, where it has claimed 3,287 lives, has spread to 199 countries, territories and areas around the world and claimed more than 21,000 lives worldwide so far.
In India, COVID-19 has claimed 17 lives and infected 724 people so far. The entire country has come to a virtual standstill, with a 21-day nationwide lockdown imposed by the government since Wednesday. The pandemic is expected to severely affect the economy, not just in India but across the world.
The RBI said that, in its Sixth Bi-monthly Resolution of February 2020, CPI headline inflation was projected at 6.5 per cent for Q4:2019-20. The prints for January and February 2020 indicate that actual outcomes for the quarter are running 30 bps above projections, reflecting the onion price shock.
"Looking ahead, food prices may soften even further under the beneficial effects of the record foodgrains and horticulture production, at least till the onset of the usual summer uptick. Furthermore, the collapse in crude prices should work towards easing both fuel and core inflation pressures, depending on the level of the pass-through to retail prices.
"As a consequence of COVID-19, aggregate demand may weaken and ease core inflation further. Heightened volatility in financial markets could also have a bearing on inflation," it said.
Turning to growth, apart from the continuing resilience of agriculture and allied activities, most other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread and duration. If COVID19 is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India, the statement said.
The slump in international crude prices could, however, provide some relief in the form of terms of trade gains. Downside risks to growth arise from the spread of COVID-19 and prolonged lockdowns. Upside growth impulses are expected to emanate from monetary, fiscal and other policy measures and the early containment of COVID-19, it said.
"The MPC is of the view that macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic. Central banks across the world have responded with monetary and regulatory measures – both conventional and unconventional.
"Governments across the world have unleashed massive fiscal measures, including targeted health services support, to protect economic activity from the impact of the virus. To mitigate the economic difficulties arising out of the virus outbreak, the Government of India has announced a comprehensive package of Rs. 1.70 lakh crore, covering cash transfers and food security, for vulnerable sections of society, including farmers, migrant workers, urban and rural poor, differently abled persons and women.
"The MPC notes that the Reserve Bank has taken several measures to inject substantial liquidity in the system. Nonetheless, the priority is to undertake strong and purposeful action in order to minimise the adverse macroeconomic impact of the pandemic. It is in this context that the MPC unanimously votes for a sizable reduction in the policy repo rate, but with some differences in the quantum of reduction.
"Furthermore, the MPC also notes that the Reserve Bank has decided to undertake several measures to further improve liquidity, monetary transmission and credit flows to the economy and provide relief on debt servicing. It also underscores the need for all stakeholders to fight against the pandemic. Banks and other financial institutions should do all they can to keep credit flowing to economic agents facing financial stress on account of the isolation that the virus has imposed. Market participants should work with regulators like the Reserve Bank and the Securities and Exchange Board of India (SEBI) to ensure the orderly functioning of markets in their role of price discovery and financial intermediation. Strong fiscal measures are critical to deal with the situation," the statement said.
According to it, all members of the MPC voted for a reduction in the policy repo rate andmaintaining 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. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra and RBI Governor Shaktikanta Das voted for a 75 bps reduction in the policy repo rate. Dr. Chetan Ghate and Dr. Pami Dua voted for a 50 bps reduction in the policy repo rate.
The minutes of the MPC’s meeting will be published by April 13, 2020.
The RBI had kept the repo rate unchanged at 5.15 per cent, in the view of the then elevated path of inflation, on the one hand, and the subdued economic activity, on the other, in its Sixth Bi-monthly Monetary Policy Statement 2019-20 on February 6, 2020 and in its Fifth Bi-monthly Monetary Policy Statement 2019-20 on December 5, 2020 after decreasing it from 6.50 per cent to 5.15 per cent in the previous five statements between February 7, 2019 and October 4, 2019.