India cuts interest rates to shore up Covid-19 ravaged economy

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In March RBI had allowed a three-month EMI moratorium between March 1 and May 31

"RBI's Monetary Policy Committee met again from May 20-22". The six member monetary policy committee voted 5:1 in favour of 40 bps cut in interest rate.

Agriculture and allied activities have given a beacon of hope for the country, said the RBI Governor.

"Assuming that economic activity gets restored in a phased manner in the second half of this year and taking in consideration favourable base effect, it is expected that combined fiscal, monetary and administrative measures now undertaken by both the government and RBI create conditions for gradual revival of activities in the second half of 2020-21".

The Reserve Bank of India (RBI) on Friday slashed interest rates, extended moratorium on loan repayments and allowed banks to lend more to corporates in an effort to support the economy which is likely to contract for the first time in over four decades. However, the decision to extend the moratorium period by another 3 months is a significant negative for the private banks both in the medium and long term. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, were shifted across the board by three months. It is being speculated that with the extension of the lockdown till May 31, the moratorium will be extended for a period of another three months.

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The RBI had also announced in March that all lending institutions are allowed to defer interest payment on working capital repayments outstanding on March 1, 2020, by three months.

The rate cuts did little to soothe investor fears, with shares in Mumbai falling nearly two percent Friday.

Among other regulatory measures, the Indian central bank hiked the group exposure limit for banks to 30 per cent from 25 per cent.

He further reported that Industrial production shrank by close to 17% in March with manufacturing activity down by 21%.

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There will be gradual revival of activity and demand by the second half of FY21, said RBI governor.

"Assuming that economic activity gets restored in a phased manner in the second half of this year and taking in consideration favourable base effect, it is expected that combined fiscal, monetary and administrative measures now undertaken by both the government and RBI create conditions for gradual revival of activities in the second half of 2020-21.

The top 6 industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones", RBI governor Shaktikanta Das said. "Elevated level of inflation in pulses worrisome, requires review of import duties", he said.

Headline inflation may remain firm in the first half of the year and may ease in second half.

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Inflation is expected to fall below the 4 percent target by Q3, Q4, the RBI Governor said. Considering the current situation due to COVID-19 outbreak, this change has been made said Shaktikanta Das.

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