Repo Rate Cut by RBI | Press Conference Highlights (May 22)

RBI Cuts Repo Rate by 40 bps & Extends Loan Moratorium by Another 3 Months

Introduction

In order to address the adverse macroeconomic impact of COVID pandemic, RBI cut Repo Rate by 40 bps and extended the Loan Moratorium by another 3 months to August 31, 2020. Lets see the key highlights of the RBI Governor’s press conference (May 22) after an off-cycle monetary policy committee (MPC) meet held between May 20-22, 2020.

Repo Rate Cut by RBI | Press Conference Key Highlights (May 22, 2020)

On May 22, 2020, RBI Governor Mr. Shaktikanta Das announced various measures to tackle the devastating economic impact of the ongoing coronavirus-induced lockdown. Here are the key highlights of RBI Governor press conference held today.

Adverse Impact of COVID-19 Pandemic on Global & Domestic Economy

• Global Economy
  • The macroeconomic and financial conditions are very severe across the world. The Global economy is inexorably headed into recession. While, the volume of world trade can shrink by 13-32% in 2020 as projected by WTO (World Trade Organization).
  • The global Manufacturing Purchasing Managers Index (PMI) contracted to an 11-year low in April 2020. Whereas, the global services PMI recorded its steepest decline in the history of the index.
• Indian Economy
  • Domestic economic activity has been impacted severely by the 2 months lockdown. The top 6 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.
  • Key Concern Points for Domestic Economic Activities :
    1. Halted Investment Demand
    2. Capital Goods : 36% decline in production & contraction in imports of capital goods by 27% and 57.5% in March & April respectively
    3. Dampened Private Consumption, which accounts for 60% of Domestic demand
    4. IIP : Industrial Output shrank by 17% in March 2020, with Manufacturing activity down by 27%
    5. PMI : The Manufacturing PMI for April recorded its sharpest deterioration to 27.4, spread across all sectors. While, the Services PMI plunged to an all all-time low of 5.4 in April 2020.

The detailed updated Report on India’s Key Economic Indicators is available at : Economic Indicators Report May 2020.

Monetary Policy Measures

Policy Repo Rate Cut & Monetary Policy Stance

• Repo Rate Cut
  • May 22 : RBI cut repo rate by 40 bps to 4% from 4.40%
    • RBI slashed the benchmark lending rate by 40 basis points to mitigate the impact of the COVID-19 crisis. In an off-cycle meeting of the MPC, the Repo rate cut decision was taken unanimously to support growth.
  • March 27 : RBI cuts repo rate by 75 bps to 4.40%
• Reverse Repo Rate Cut
  • May 22 : Reverse Repo Rate cut by 40 bps to 3.35%
    • Following the reduction in the Repo Rate, the Reverse Repo Rate has been cut to 3.35% from 3.75%
  • April 17 : Reverse Repo Rate cut by 25 bps to 3.75% from 4%
  • March 27 : Reverse Repo rate cut by 90 bps to 4% from 4.90%
• According to the Repo Rate cut by RBI, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25% from 4.65%.
• Monetary Policy Committee (MPC) has decided to continue with 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.

Inflation Outlook

• RBI Governor Mr. Shaktikanta Das said that the Inflation outlook is highly uncertain due to the outbreak of the COVID-19 pandemic.
• There is a need to review import duties to moderate prices.
• Headline inflation may remain firm in the first half of the year ie. H1:FY21 and may ease in H2:FY21. Inflation may fall below 4% in Q3 and Q4 FY21.

GDP Growth Outlook

• India’s GDP growth is estimated to be in negative territory in FY21, as RBI mentioned.
• There is a collapse in demand in both urban and rural demand since March 2020. Steepest contraction in IIP and all time low PMI numbers in lockdown period raised a big concern about the progress of overall economic activities.
• However, there will be a gradual revival of activity and demand by the second half of the current fiscal ie. H2:FY21.

Regulatory Measures

Loan Moratorium Extended by Another 3 Months

• RBI has extended the loan Moratorium by another 3 months to August 31, 2020, which makes it a six-month moratorium.
• On March 27, RBI had permitted all lending institutions to allow 3-months moratorium relief to their borrowers from March 1, 2020, up to May 31, 2020 to help ease any debt servicing for borrowers impacted due to COVID-19.
• The moratorium on interest on working capital was also extended by 3-months.
• Also, the interest accumulated for the six-month moratorium period can be converted into a term loan.

Refinancing Facility for Small Industries Development Bank of India (SIDBI)

• On April 17, RBI had announced a special refinance facility of Rs.15,000 Cr to SIDBI at RBI’s policy repo rate for a period of 90 days for on-lending/refinancing.
• In order to provide greater flexibility to SIDBI, it has been decided to roll over the facility at the end of the 90th day for another period of 90 days.

Investments by Foreign Portfolio Investors (FPIs) under the Voluntary Retention Route (VRR)

• Since its introduction, the VRR scheme has evinced strong investor participation, with investments exceeding 90% of the limits allotted under the scheme.
• In view of difficulties expressed by FPIs and their custodians on account of COVID-19 related disruptions in adhering to the condition that at least 75% of allotted limits be invested within 3-months.
• Now, an additional three months time will be allowed to FPIs to fulfil this requirement.