RBI cuts repo rate to make loans cheaper and extends moratorium on loan repayments
Amid the nationwide lockdown to curb the spread of deadly coronavirus, Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday announced a reduction in the repo rate by 40 basis points from 4.4 percent to 4 percent and also extended the moratorium on loan repayments by another 3 months. In a move to support the economy, the central bank simultaneously reduced the reverse repo rate to 3.35 percent.
RBI governor Shaktikanta Das addressed the media through a video conference and said that the central bank’s Monetary Policy Committee (MPC) members voted 5-1 for a reduction in policy repo rate and for maintaining the accommodative stance of monetary policy as long as it is necessary to revive growth and to mitigate the impact of COVID-19 while ensuring that inflation remains within the target.
This is the third media briefing by the RBI governor since the nationwide lockdown began on March 25. To trim the impact of the coronavirus crisis on the economy, the rate cut has come after the MPC advanced the earlier scheduled meeting in the first week of June.
RBI cuts repo rate by 40 bps
The repo rate at which the RBI lends short-term funds to commercial banks now stands at 4 percent. The reduction in the key policy rate will allow banks more room to lower the EMI burden for their borrowers. This is expected to bring down lending rates.
The RBI on 27 March in an advanced monetary policy review had slashed the repo rate by 75 bps to stimulate growth. In total, they have cut the repo rate by 115 bps since the lockdown started. (100 basis points/bps = 1 percent).
Reverse repo rate at 3.35 percent
RBI also announced a reduction in the reverse repo rate to 3.35 percent from the existing 3.75 percent. The reverse repo rate is the interest rate at which the RBI borrows funds from commercial banks.
In March also, RBI had reduced its reverse repo rate to 3.75 percent to discourage commercial banks from parking idle funds with it and spur lending instead, to revive a flagging economy amid the coronavirus crisis.
Moratorium on payment of loans
In view of the extension of the lockdown and continuing disruption on account of the outbreak of coronavirus, the RBI also extended a three-month moratorium on term loans from June 01 to August 31. The RBI has extended it to provide much-needed relief to borrowers whose income has been hit due to the lockdown crisis. The loan moratorium allows banks to defer EMI payments by their customers.
In March also, the central bank had allowed a three-month moratorium on payment of all term loans due between March 1, 2020, and May 31, 2020.
GDP growth in 2020-21 likely to in negative
Shaktikanta Das said that India’s gross domestic product (GDP) growth is estimated to remain in the negative territory in 2020-2021 as the outbreak of coronavirus has disrupted economic activities. “India is seeing a collapse of demand. Private consumption has seen the biggest blow due to the COVID-19 outbreak, investment demand has halted. The government revenues have been impacted severely due to slowdown in economic activity,” said the governor.
Mr. Das said the combined impact of demand compression and supply disruption will depress economic activity in the first half of the current fiscal. However, it is expected that combined fiscal, monetary, and administrative measures are currently undertaken by both the government and RBI will create conditions for the gradual revival of the economy in the second half of FY 2020-21.
Inflation outlook highly uncertain
RBI Governor said the inflation outlook is highly uncertain due to the outbreak of the COVID-19 pandemic and expressed concern over elevated prices of pulses. He also said there is a need to review import duties to moderate prices. Inflation forecasting has become complicated due to partial and incomplete data released by the National Statistics Organisation (NSO).
Mr. Das added that headline inflation may remain firm in the first half of the current financial year and only ease in the latter part of the year. Inflation may fall below 4 percent in the third or fourth quarter of the current fiscal, according to the Governor.
What RBI rate cut means for borrowers
For borrowers, this is good news, especially for those whose loans are linked to External benchmark like the repo rate. This rate cut is likely to reduce equated monthly installments (EMIs) of borrowers, and also make it cheaper to take new loans.
Impact of the rate cut on existing borrowers with loans linked to an external benchmark
Borrowers whose loans are linked with an external benchmark i.e. repo rate as maintained by the RBI can expect to see their EMIs coming down in the next three months. This is because as per RBI’s circular on linking of loan interest rates to an external benchmark, the rates have to be reviewed and reset by banks at least once every three months.
Therefore, today’s rate cut will lower a borrower’s EMI in the next three months. However, if RBI starts to hike repo rates, your interest rates will go up in tandem. So, external benchmark linked interest rates are likely to be more volatile than the MCLR linked rates.
The recent repo rate cut will make the new loans cheaper if your loan is linked to an external benchmark. While availing a loan linked to an External benchmark, do compare the spread and risk premium charged by the banks over and above the External benchmark, to get the cheapest interest rate.
However, for fixed deposit (FD) investors, the latest rate cut is likely to further reduce the interest rates on deposits and pinch their pockets.
The RBI Governor said the combination of all the above mentioned measures will create conditions that will enable a gradual economic revival during the second half of the year. COVID-19 has crippled the economy and activities across the world. The announcements are part of efforts to revive the economy reeling under the COVID-19 impact, which has pushed the economy into a standstill, hurt businesses, and rendered thousands of people jobless.