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RBI cuts rates; extends loan freeze

RBI cuts rates; extends loan freeze

The Reserve Bank of India (RBI) on Friday announced an unexpected cuts in the repo and reverse repo rates by 40 basis points to four per cent 3.35 per cent respectively, while extending the loan moratorium by three more months till August 31, making it a total six-month suspension.

Governor Shaktikanta Das said India's economic growth would remain in negative territory, with some pick up in 2020 second half, while headline inflation rate in the first half will remain intact but by the third quarter and fourth quarter, it may fall below the target of four per cent.

"Simultaneous fiscal, monetary and administration measures will create conditions for a gradual revival of activity in the second half of 2020-2021."

Announcing his second rates cut this year, Das said the decision followed an off-cycle meeting of the monetary policy committee (MPC).

On March 27, the RBI slashed the repo rate to 4.4 per cent and reverse repo rate to 3.75 per cent, by a massive 75 basis points, and also announced a three-month loan moratorium to provide relief to borrowers whose income has been hit due to the lockdown.

"We must have faith in India's resilience and come out of all odds," the RBI chief said in a video conference.

He said the MPC had also voted to maintain its "accommodative" stance as long as it is necessary to revive growth.

The governor said that there is a collapse in demand in both urban and rural areas since March. This has taken a toll on fiscal revenues while the biggest blow came from a slump in the private consumption with consumer durables production slipping by 33 per cent in March.

The RBI steps follow government's massive Rs20 trillion economic stimulus package, including the Rs 8.0 trillion of liquidity measures announced by apex bank since March to deal with the Covid fallout.

In order to provide greater flexibility of Small Industries Development Bank of India to the MSME sector, another 90 days extension for the 90-day term loan facilities will be offered. The governor said the RBI is ready to use all its instruments to address the concerns of the unknown future.

Among other regulatory measures, the RBI hiked the group exposure limit for banks to 30 per cent from 25 per cent. The RBI had set the 25 per cent limit in June 2019 and had capped lenders' exposure to a single party at 20 per cent.

Lincoln Bennet Rodrigues, founder and chairman, Bennet & Bernard Group, said rate cuts along with the further extension of loan moratoriums is definitely a welcome move and will benefit the real estate sector in the near future. "It will enable banks to lend even more and push many fence-sitters onto the market as home loan interest rates are expected to fall down."

"What needs to be seen is how quickly the banks pass on the benefits to the borrowers. All these steps auger well to cushion the impact of Covid-19 on the Indian economy." - [email protected]