India central bank pledges more easing as economy set to shrink

India central bank pledges more easing as economy set to shrink”

The Reserve Bank of India (RBI) slashed the repo rate, the rate at which it lends to commercial banks, by 40 basis points to 4.0 percent, the second cut this year.

The rate now stands at 4% from the earlier 4.4%.

India's central bank cut interest rates in an unscheduled announcement today and kept the door open for further easing to help an economy it expects will contract for the first time in more than four decades. Considering the current situation due to COVID-19 outbreak, this change has been made said Shaktikanta Das.

New Delh RBI Governor Shaktikanta Das is addressing the media days after Finance Minister Nirmala Sitharaman unveiled details of the Rs 20 lakh crore economic package.

The Indian economy has come to a screeching halt since March 25, when a countrywide lockdown was announced to contain coronavirus spread.

"The off-cycle move may have caught the markets off-guard, but it shouldn't be a total surprise given recent dismal activity indicators", said Prakash Sakpal, an economist at ING Groep NV in Singapore. He added that deficient demand may hold down pressures on core inflation (excluding food and fuel), although persisting supply dislocations impart uncertainty to the near term outlook.

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Governor Das said that India's gross domestic product (GDP) will see contraction and may well be in negative territory in FY21.

In March, the central bank had allowed a three-month moratorium on payment of all term loans due between March 1 and May 31. It is very comfortable but that combined with the guarantee from the government at least as far as the MSME sector is concerned should make some improvement as far as pick up in bank credit is concerned. "The RBI (Reserve Bank of India) will continue to remain vigilant and in battle readiness to use all its instruments and even fashion new ones, as recent experience has demonstrated, to address dynamics of the unknown future".

One of the four measures taken to mitigate the impact of COVID-19 is improving the functioning of markets and market participants.

Regulatory measures to support exports, imports, states. The monetary policy committee (MPC) also chose 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. In all likeliness, the committee will announce its second bi-monthly policy of 2020-21 on June 5.

Since the monetary policy meeting in February 2020, the central bank has infused funds amounting to 3.2% of the GDP to deal with the liquidity problem.

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