Reserve Bank of India reduced the repo rate by 40 basis points to 4% in its monetary policy this month however it maintains an ‘accommodative stance’. The reverse repo rate has been reduced to 3.35% from 3.75%.
The members of the MPC unanimously voted for a reduction in the repo rate however Mr. Chetan Ghatge had voted for a reduction by 25 basis points instead of 40 bps as voted by the other five members, said Shaktikanta Das, governor, RBI.
“The 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,” said RBI in a press release.
In this article
What is meant by accommodative stance and why is it necessary?
An accommodative stance means that there is room for lowering of interest rates in the future to revive growth and demand in the economy.
Das mentioned that even as the central government and the central bank have worked hand in hand to revive the economy and provide financial support, COVID-19 situation needs to deteriorate, RBI requires more headroom to deal with policy measures. Hence, the accommodative stance.
Extension in Loan Moratoriums
RBI has extended the moratorium on loan instalments by three more months. Earlier on March 27, RBI had extended the moratorium by three months till June 1 which has now been extended to August 31, 2020.
The moratorium has been provided to cope with Covid-19 related blockages. This will not make any changes in the original terms and conditions of the loan agreement and delayed payment in EMIs will not cause any downgrade in the loans or your credit scores.
What does this mean for you?
Loan Rates: Your loan EMIs may lower after the banks successfully transmit the repo rate reduction into the interest rate. You will basically be paying lesser interest on the loans you have taken from banks. The interest rate you have been paying will see an approximate reduction of 40 basis (or .4%) points making it easier on your purses.
Taking the example of SBI, if you have taken a home loan and it is linked to the floating rate system which is the external benchmark rate, the interest rate may range between 7-7.4%. The range earlier was 7.4 to 7.75%.
FD Rates: a reduction in repo rates is always good news for borrowers but not for fixed deposit holders because the deposit rates are likely to reduce further. This is done because low-interest rates on loans basically mean low income for banks. Banks compensate for this gap by offering lesser interest in fixed deposits.
SBI has already reduced its deposit rates on multiple occasions, the most recent one was announced on May 7. Currently, for a one year fixed deposit, the interest rate is 5.5% and for senior citizens, the rate is 6%. These rates were effective on May 12, 2020.
Did you know? As we are aware, the central bank had introduced an external benchmark lending rate (EBLR) based on loans in 2019. This means that the interest rate offered to you by the bank in the loans would be linked to the repo rate directly.
So, in case of any reductions by the RBI, there should be an immediate transmission in the loan rates and the EMIs. Earlier loans were offered at marginal cost lending rates (MCLR) which were more dependent on the bank’s financial condition.
MPC Outlook on growth and inflation
While on inflation RBI finds the outlook a bit uncertain, when it comes to growth and GDP figures, RBI is certain that it may further deteriorate to negative levels.
On Inflation: On inflation, RBI said that after supply lines restore, the high inflation numbers reported in April are expected to come down however the overall outlook remains uncertain. Food inflation surged to 8.6% in April from 7.8% in March.
Fuel prices globally are expected to remain low which may keep core inflation (food and fuel) in place, However, it is “supply dislocations” that are adding to the uncertainty. Although the RBI did say that “the forecast of normal monsoon also portends well for food inflation”, meaning that food inflation may dip lower supported by good monsoons.
On Growth: RBI governor expects growth to be negative in FY20-21. Even with the apparent partial lifting of lockdown by the month-end, RBI expects growth to be subdued in Q2 of FY 20-21. Recovery is expected over the last two quarters. RBI sees social distancing measures and the prolonged existence of the pandemic as a downside risk to domestic growth. “Upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phased out faster,” said the governor.
Covid 19 Relief: Regulatory Measures by the RBI
Refinancing facility for Sidbi: RBI had announced a refinancing facility of ₹15,000 crores for Sidbi. The facility has been given a rollover for another period of 90 days after the first period ends to provide greater financial flexibility.
Export-Import: RBI will be providing ₹15,000 crores to the EXIM Bank for 90 days with a rollover of up to a maximum of one year to meet foreign exchange requirements. Apart from liquidity extended to Exim Bank, the government has also provided certain regulatory relaxations to exporters and importers.