NEW DELHI: Calling the coronavirus COVID-19 pandemic an ''unprecedented threat and invisible assassin'', the Reserve Bank of India (RBI) on Friday (March 27, 2020) cut the Repo Rate by 75 basis points to 4.4 per cent and slashed Reverse Repo Rate by 90 basis points to 4 per cent as part of measures to ease the pain on banks and industries which are suffering from the 21-day lockdown.
This was announced by RBI Governor who said, “Repo rate has been reduced by 75 basis points to 4.4.%. Reverse repo-rate reduced by 90 basis points to 4%.’’ He added that the RBI Monetary policy committee voted 4:2 majority to cut 75 basis points to 4.4 pc during its meeting between March 25-27.
Here are some of the key policy decisions taken by RBI-
Seventh Bi-monthly Monetary Policy Statement, 2019-20, Resolution of the Monetary Policy Committee (MPC), Reserve Bank of India
On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (March 27, 2020) decided to:
• reduce 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;
• accordingly, the marginal standing facility (MSF) rate and the Bank
Rate stand reduced to 4.65 per cent from 5.40 per cent;
• further, consequent upon the widening of the LAF corridor as
detailed in the accompanying Statement on Developmental and
Regulatory Polices, the reverse repo rate under the LAF stands reduced
by 90 basis points to 4.0 per cent.
• 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 main considerations underlying the decision are set out in the statement below.
Assessment
Global Economy
2. Global economic activity has come to a near standstill as COVID-19 related lockdowns and social distancing are imposed across a widening swathe of affected countries. Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed. The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic.
There is a rising probability that large parts of the global economy will slip into
recession.
3. Financial markets have become highly volatile from January onwards
due to the outbreak of COVID-19. Panic sell-offs have resulted in wealth
destruction in equity markets across advanced and emerging economies alike.
In the former, flight to safety has pulled down government bond yields to
record lows with some hardening in recent days. In the latter, the rush to exit
has rendered fixed income markets illiquid and resulted in firming up of yields.
Emerging and advanced economy currencies are experiencing severe
depreciation pressure on a daily basis because of fire sales due to extreme
risk aversion. At this point, only the US dollar remains safe haven in a highly
uncertain outlook. Japanese yen and gold – the other two safe havens till the
early part of March – have given way to a flight to cash. International crude
prices initially traded with a softening bias from January in anticipation of
demand weakening due to the COVID-19 outbreak. Production cut
disagreements among key oil producers, however, set off retaliatory supply
scale-ups and a price war that plunged international Brent crude prices to a
low of US$ 25 per barrel on March 18, 2020. These developments are likely to
dampen inflation across advanced and emerging economies. Central banks
and governments are in war mode, responding to the situation with several
conventional and unconventional measures targeted at easing financial
conditions to avoid a demand collapse and to prevent financial markets from
freezing up due to illiquidity.
Domestic Economy
4. The second advance estimates of the National Statistics Office released
in February 2020 implied real GDP growth of 4.7 per cent for Q4:2019-20
within the annual estimate of 5 per cent for the year as a whole. This is now at
risk from the pandemic’s impact on the economy. High frequency indicators
suggest that private final consumption expenditure has been hit hardest, even
as gross fixed capital formation has been in contraction since Q2:2019-20. On
the supply side, the outlook for agriculture and allied activities appears to be
the only silver lining, with foodgrains output at 292 million tonnes being 2.4 per
cent higher than a year ago. A pick-up in manufacturing and electricity
generation pulled industrial production into positive territory in January 2020
after intermittent contraction and/or lacklustre activity over the past five
months; however, more data will need to be watched to assess whether the
recent uptick will endure in the face of COVID-19. Meanwhile, most service
sector indicators for January and February 2020 moderated or declined. Since
then anecdotal evidence suggests that several services such as trade,
tourism, airlines, the hospitality sector and construction have been further
adversely impacted by the pandemic. Dislocations in casual and contract
labour would result in losses of activity in other sectors as well.
5. Retail inflation, measured by the consumer price index, peaked in
January 2020 and fell by a full percentage point in February 2020 to 6.6 per
cent, as the ebbing of onion prices brought down food inflation from double
digits in the preceding two months. Price pressures, however, remain firm
across protein-rich items, edible oils and pulses; but the shock to demand from
COVID-19 may weaken them going forward. While fuel inflation increased
sharply in February on the back of the delayed domestic adjustment to
international LPG prices, the plunge in international crude prices in March may
bring a measure of relief to the extent it is allowed to pass-through. CPI
inflation excluding food and fuel eased in February under the weight of softer
prices of transport and communication, and personal care. Households’
inflation expectations a year ahead softened by 20 bps in the March 2020
round of the Reserve Bank’s survey.
6. Domestic financial conditions have tightened considerably, with equity
markets facing massive sell-offs by foreign portfolio investors (FPIs). In the
bond market too, yields have risen on sustained FPI selling, while redemption
pressures, drop in trading activity and generalised risk aversion have pushed
up yields to elevated levels in commercial paper, corporate bond and other
fixed income segments. In the forex market, the Indian rupee (INR) has been
under continuous downward pressure. Under these conditions, the Reserve
Bank has endeavoured to keep financial markets liquid, stable and functioning
normally. Systemic liquidity surplus, as reflected in net absorptions under the
LAF, averaged ₹2.86 lakh crore in March (up to March 25, 2020). In addition,
the Reserve Bank undertook unconventional operations in the form of auctions
of what is called ‘operation twist’ involving the simultaneous sale of short-term
government securities (of ₹28,276 crore) and purchase of long-term securities
(of ₹40,000 crore), cumulatively injecting a net amount of ₹11,724 crore. The
Reserve Bank also conducted five long term repo auctions of 1 year and 3
years tenors of a cumulative amount of ₹1.25 lakh crore so far to inject liquidity
and improve monetary transmission. It also conducted two sell-buy swap
auctions to inject cumulatively US dollar liquidity into the forex market to the
tune of US$ 2.71 billion on March 16 and 23. Open market purchase
operations of ₹10,000 crore on March 20 and ₹15,000 crore each on March 24
and March 26 have been conducted to bolster liquidity and smoothen financial
conditions.
7. In the external sector, merchandise exports expanded in February 2020
after posting six consecutive months of contraction. Import growth also moved
into positive territory after eight months of continuous decline. Consequently,
the trade deficit widened marginally on a year-on-year basis although it was
lower than its level a month ago. On March 12, the Reserve Bank released
balance of payments data which showed the current account having moved to
near balance in Q3:2019-20 with a deficit of only 0.2 per cent of GDP. On the
financing side, net FDI inflows at US$ 37.8 billion during April-January 2019-20
were substantially higher than a year ago. Portfolio investment recorded net
outflows of US$ 5.2 billion during 2019-20 (up to March 25), down from US$
6.6 billion a year ago. India’s foreign exchange reserves reached a level of
US$ 487.2 billion on March 6, 2020 – an increase of US$ 74.4 billion over their
end-March 2019 level.
Outlook
8. In the 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.
9. 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 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.
10. 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 ₹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.
11. All members voted for a reduction in the policy repo rate and
maintaining 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.
12. Dr. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra
and Shri 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.
13. The minutes of the MPC’s meeting will be published by April 13, 2020.
(Yogesh Dayal)
Press Release: 2019-2020/2129 Chief General Manager
