RBI slashes key rate by 40 bps to an all-time low, Predicts GDP shrinkage
On Friday, the Reserve Bank of India (RBI) announced cut in key interest rates by 40 basis points, to a new all-time low. This decision came unexpectedly as RBI is citing negative GDP growth in the current fiscal period.
This is a double blow to the economy as the effect on low production and demand is bound to cause inflation in the first half of the fiscal year.
This is the eighth straight cut and second ‘off-cycle’ cut by RBI. In the June MPC (Monetary Policy Committee) which was shifted to May for the year 2020-22, the policy rate was cut by 40 basis points from 4.4% to 4.0% by a 5-1 majority vote.
In extension, the Marginal Standing Facility (MSF) rate and bank rate reduced from 4.65% to 4.25%, and the reverse repo rate reduced to 3.35% from 3.75% consequently.
RBI has also allowed the lenders to extend moratorium by three months for loan repayments that were due to end on May 31.RBI predicts GDP shrinkage for the first time in 41 years
RBI forecasts that the Indian economy is expected to shrink for the first time in 41 years. This is while the inflation prediction remains uncertain.
RBI Governor Shaktikanta Das said on Friday, “GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up on growth impulses from H2: 2020-21 onward.”
If the estimation regarding economy by RBI and economists is accounted for, then this will be the first contraction for India, Asia’s third-largest economy, since1979-80 when GDP growth had plummeted to 5.2%.
According to IMF’s prediction in April however, China and India would be the only countries to have economic growth while the rest of nations will contract.
Home Loan rates dip to lowest in 15 years
RBI announcement brought relief to home loan borrowers. The interest rates in home loans are set to come down by 40 bps (basis points) to around 7%, which is lowest in the last 15 years. It is to be noted that 100bps equal to 1 percentage points.
The loan borrowers who are facing income uncertainty due to COVID-19 lockdown are allowed to avail of a three-month moratorium additionally to help them recover financially.
RBI interest rates on existing home loans for up to INR 30 lakh will come down to 7% from the existing 7.4%. Similarly, on loan between INR 30 lakh to 75 lakh interest rate will drop to 7.25% from 7.65%, and for loans above INR 75 lakh it will drop to 7.35% from 7.75%.
For women loan borrowers, the rates would be further lowered by 5 bps to 45 bps.
The banks and housing finance companies with home loans not linked to the repo rate are allowed to pass on the reduction in their home loan interest rates.
Breathing space has been provided to businesses as well. Period of pre and post-shipment credit has been extended from 1 year to 15 months to help exporters fulfill the delayed orders.
The RBI announcement on the economy shrinkage prediction and present COVID-19 lockdown situation have spooked the market on Friday, with Sensex closing 260 points lower.
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