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  3. RBI cuts repo rate by 40 basis points to 4%

RBI cuts repo rate by 40 basis points to 4%

22 May 2020 Evaluate
In the wake of COVID-19, the Reserve Bank of India (RBI) has reduced the policy repo rate under the liquidity adjustment facility (LAF) by 40 basis points (bps) to 4.0 per cent from 4.40 per cent with immediate effect. Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25 per cent from 4.65 per cent, while the reverse repo rate under the LAF stands reduced to 3.35 per cent from 3.75 per cent.
 
The Monetary Policy Committee (MPC) also decided 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. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
 
On the growth outlook, the RBI is expecting economic activity other than agriculture likely to remain depressed in Q1 2020-21 in view of the extended lockdown. It also said that even though the lockdown may be lifted by end-May with some restrictions, economic activity even in Q2 may remain subdued due to social distancing measures and the temporary shortage of labour.
 
RBI further noted that recovery in economic activity is expected to begin in Q3 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives. As per the RBI, for the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant. On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phased out faster.
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