India’s central bank has cut its benchmark interest rate to its lowest level on record as policymakers combat the potentially ruinous economic and humanitarian effects of a 21-day shutdown due to the coronavirus outbreak.
“A war effort has to be mounted and is being mounted to combat the virus,” said Shaktikanta Das, governor of the Reserve Bank of India. “The time has come for the Reserve Bank to unleash an array of instruments from its arsenal.”
The RBI’s monetary policy committee cut the country’s repo rate by 75 basis points to 4.4 per cent, the lowest since its introduction about two decades ago.
The central bank also said it would inject Rs3.7tn ($49bn) of liquidity into the financial system and would allow banks and other lenders to offer customers a three-month moratorium on loan repayments.
The unscheduled rate cut came after Prime Minister Narendra Modi on Tuesday announced a three-week curfew requiring citizens to stay at home and all but essential services to close in the country of 1.4bn people. The number of confirmed coronavirus infections rose to 691 on Friday.
The move was seen as necessary to stem the outbreak but has sparked concern for the hundreds of millions of Indians who do not have formal jobs, many of whom face hunger if they lose their income. India’s economy was already suffering one of its most painful slowdowns in years before the outbreak hit.
“The RBI has emphatically stepped up its response,” said Shilan Shah, senior India economist at Capital Economics. But he warned more fiscal measures were “needed to prevent the dramatic economic slowdown from spiralling into something even more malignant”.
The finance ministry separately on Thursday announced a $22bn relief package to aid impoverished Indians, including distribution of free grains and pulses, and direct cash transfers.
Moody’s Investors Service on Friday cut its forecast for India’s gross domestic product growth in 2020 to 2.5 per cent from over 5 per cent.
The rating agency cited the risk India and other emerging markets’ “general lack of social safety nets, weak ability to provide adequate support to businesses and households, and inherent weaknesses . . . will amplify the effects of the coronavirus-induced shock”.
Capital Economics said it expected GDP growth would slow to 1 per cent this year.
The reaction from financial markets to the RBI’s announcements was muted. The yields on 10-year treasury bonds initially dropped before paring back their losses. The Bombay Stock Exchange’s benchmark Sensex index, which is trading at its lowest level since 2017, closed down 0.4 per cent on Friday.
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