Reserve Bank of India cuts interest rates to the lowest in over 2 decades⁠ as the central bank expects the GDP to contract this financial year

• Governor Shaktikanta Das announced a repo rate cut of 40 basis points to 4%.
• The lowest benchmark interest rate India has had since 2000 till now is 4.25%.
• The Monetary Policy Committee voted unanimously to cut rates to revive growth and to mitigate the impact of COVID 19.

Interest rates in India are now the lowest ever since 2000. The Reserve Bank of India Governor Shaktikanta Das announced a repo rate cut of 40 basis points to 4%. The lowest benchmark interest rate India has had since 2000 till now is 4.25%. The decision to boost money supply in the economy by cutting interest rates was triggered by the RBI estimate of a contraction in India's gross domestic product (GDP) this year.

The Monetary Policy Committee was unanimous in its decision to cut rates and “maintaining the accommodative stance of the MPC as long as necessary to revive growth and to mitigating the impact of COVID 19, while ensuring that inflation remains within the target,” according to Governor Das.

Watch the entire RBI press conference here:

Repo rate is the rate at which banks borrow from the central bank. Banks arrive at the final lending rate after adding a profit margin to the repo rate to cover their costs. "Today’s repo rate cut will further help banks to lower home loan interest rates, which may get several more fence-sitters onto the market. Moreover, the repo rate cut may compel banks to reduce the interest rates for FDs even further - this could result in even more people leaning towards housing as a better investment option," Anuj Puri, the Chairman of Anarock Property Consultants, said.

The reverse repo rate (the rate which banks get for parking funds with the RBI) has also been reduced to 3.35%. This is expected to further disincentivise banks from keeping the money safe with the RBI and instead lend it in the market.

The RBI decision to cut interest rates for the fifth time in about a year did not excite the markets. Sensex was trading 0.5% lower at 10:30 am on May 21. Bank Nifty, the index India's top banking stocks, fell nearly 2.8% taking the total gash for the year to over 46%.

"The reduction in interest rates are a great relief, but a new phenomenon is visible. Along with the risk aversion by the banks to lend, even the borrowers are apprehensive about increasing debts on their balance sheets in the face of a grave economic situation. The downside risks to the economy are getting sharper, as recognised by the RBI Monetary Policy Committee. Under such circumstances, restructuring of debts on a wider scale and a willingness to share the grave consequences of the global pandemic are essential," ASSOCHAM Secretary General, Deepak Sood, said.

The RBI governor also warned against runaway inflation. "Inflation outlook is highly uncertain. Supply shock to food prices in April may show persistence over the next few months depending on lockdown and time it takes to restore supply chains after relaxation," he said. "Headline inflation may remain firm in the first half, but will ease out in the second half," he added.

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