NEW DELHI -- The Reserve Bank of India on Friday cut the benchmark interest rates by 75 basis points to 4.40% in a surprise move that comes amid concerns over economic fallout from the global outbreak of COVID-19.
According to historical data since 2003 provided by RBI, the lowest interest rate was 4.75% from April 2009 to March 2010, just after the global financial crisis. The central bank not only cut rates but also announced a three-month loan moratorium, bringing relief to borrowers with home and car loans, among others.
The central bank advanced its monetary policy committee meeting which was to happen next week, and voted for "a sizable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19 while ensuring that inflation remains within the target," RBI Gov. Shaktikanta Das said.
The move, which is expected to calm the nerves of equity investors, comes a day after Prime Minister Narendra Modi's government announced a 1.7 trillion rupee ($22.6 billion) relief package for the welfare of poor people affected by the ongoing three-week lockdown to prevent the spread of the coronavirus in the country.
The committee also voted to reduce the reverse repo rates by 90 basis points to 4%. "The purpose of this measure relating to the reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy," Das said.
Last year, the central bank aggressively cut rates by a total of 135 basis points from February to October to help the government lift a slowing economy. It paused at 5.15% and kept it unchanged until Friday's announcement.
India had until Thursday night reported a total of 694 confirmed cases of the coronavirus, including 16 deaths. Its rate cut follows similar actions by other central banks around the world. The U.S. Federal Reserve earlier this month trimmed lending rates to nearly zero.
Among other measures to deal with the coronavirus outbreak, the RBI said it would infuse liquidity of 3.74 trillion rupees ($49.8 billion) into the financial system. It will also allow lending institutions such as commercial banks and non-banking financial companies to provide a three-month moratorium on repayment of all term loans outstanding on March 1.
The three-month moratorium on loan repayments will soften the negative credit impact the coronavirus has had on borrowers in the near term, said Alka Anbarasu, vice president and senior credit officer (financial Institutions) at Moody's Investors Service. "However, there are still material downside risks to asset quality given the halt in India's economy, the impact of which will not be known until a few quarters after the end of the moratorium."
Macroeconomic research firm Capital Economics said it had expected several loosening measures to be announced by the RBI, albeit at its scheduled monetary policy committee meeting next week, "but these are even more aggressive than we had anticipated."