India cuts interest rates, boosts liquidity to deal with COVID-19 crisis
New Delhi, Mar 27 (efe-epa).- India’s central bank on Friday followed global cues by slashing its key interest rate by 0.75 percent to 4.4 percent and announcing measures to infuse a 3.74 trillion rupee (around $50 billion) liquidity boost into the cash-strapped economy, hit hard by the impacts of a nationwide lockdown to prevent the spread of COVID-19.
The announcement comes a day after Finance Minister Nirmala Sitharaman announced a $22.5 billion package in food aid, cash, loans and subsidies for the poor and vulnerable sections of the society, amid concerns that the lockdown measures could severely affect employment for daily wage workers and the important unorganized sector.
“The Monetary Policy Committee voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target,” Reserve Bank of India Governor Shaktikanta Das said in a press conference.
The term repo rate refers to the interest rate at which the RBI lends money to India’s commercial banks.
The reverse repo rate, at which the central bank borrows from commercial banks, was also slashed by 0.9 percent to 4 percent.
Das also announced measures to infuse liquidity into the economy such as reducing the cash reserve ratio – the percentage of deposits all banks have to keep with the RBI – from 4 to 3 percent for a period of one year, starting Saturday. This is expected to release liquidity worth 1.37 trillion rupees, he said.
Other measures to boost cash flow include reducing the liquidity adjustment facility and auction of long-term repos, with the total liquidity injection amounting to 3.2 percent of the GDP according to the governor.
The central bank also moved to ease loan repayment pressure on borrowers amid falling incomes, allowing all banks to offer a three-month deferment on payment of installments for term loans, apart from offering a similar deferment for interest payments on working capital.
Das admitted that apart from agriculture, all other sectors of the economy would be impacted by the coronavirus pandemic, without providing an estimate of the losses.
“If COVID-19 is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India,” the governor said in his statement.
The RBI measures have come after several central banks, such as those of New Zealand and South Korea, slashed interests rates in efforts to keep economies afloat in the face of the unprecedented crisis.
Experts have warned that India’s GDP – which grew by 4.7 percent during the last quarter of 2019 – could contract due to effects of the epidemic and the lockdown.
“One month of the lockdown means consumption will come down by almost 30 percent. If you have a 30 percent drop in consumption, then GDP will contract,” economist Mohan Guruswamy, a former economic policy adviser to the government, told EFE, warning that the mandatory nationwide quarantine could be extended beyond the current Apr. 14 deadline. EFE-EPA