The rate cut will significantly push down end-borrower rates in the system
As COVID-19 economic impact likely to threaten an already slowing economy and a day after Narendra Modi government announced relief measures to the poor, the Reserve Bank of India (RBI) joined the rescue team, announcing a 0.75 percent rate cut and a slew of measures to ease the burden on liquidity concerns in the financial system and burden on middle class borrowers bearing the brunt of the 21-day lock down.
Announcing the significant 0.75 percent rate cut that will bring the repo rate to 4.4 percent from 5.15 percent, RBI Governor Shaktikanta Das said the MPC (monetary policy committee) met during 24-27 and undertook careful evaluation of evolving macroeconomic conditions. The MPC voted for a sizable reduction in policy rates and remained in accommodative stance, Das said. Also, reverse repo is cut by an unusual 90 bps to 4 percent to discourage banks to park funds in the RBI.
Everything hinges on the depth of the COVID-19 outbreak, Das said. “Tough times never last, only tough people do,” Das said. These measures came a day after Finance Minister Nirmala Sitharaman unveiled a Rs 1.7 lakh crore economic welfare package for the poor in the backdrop of the coronavirus pandemic. Beginning March 25, for a period of three weeks, India is under a complete lock-down to curb the spread of the COVID-19.
What will the rate cut do?The rate cut will significantly push down end-borrower rates in the system. So far, in the current rate cycle, the RBI has cut the repo rate by 210 bps. Banks will now be under pressure to pass on the huge rate cut. The rate cut will also cool down the money market interest rates. Besides, this will also offer a major sentimental boost to the investors. However, the rate cut, during a lock-down, is unlikely to boost the demand significantly since the economy is in a paralysed state.
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