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RBI reduces the repo rate from 4.4% to 4% to mitigate the impact of COVID-19 - (22 May 2020)


The RBI revises the repo rate and reduced it from 4.4% to 4%. Further, it has reduced the reverse repo rate to 3.35%. The decision of the monetary policy committee (MPC) is to instil confidence and ease financial conditions further. The goals are to keep the financial system and financial markets sound, liquid and smoothly functioning and to preserve financial stability. The global economy is inexorably headed into recession. Domestic economic activity has been impacted severely by the 2 months lockdown. The top 6 industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones.

The MPC assessed that, the inflation outlook is highly uncertain. The supply shock to food prices in April may show persistence over the next few months, depending upon the state of lockdown and the time taken to restore supply chains after relaxation. The macro-economic impact of the pandemic is turning out to be more severe than initially anticipated. Beyond the destruction of economic and financial activity, livelihood and health are severely affected. Judging that the risks to growth are acute, while the risks to inflation are likely to be short-lived, the MPC believes that it is essential now to instil confidence and ease financial conditions further. This will facilitate the flow of funds at affordable rates and rekindle investment impulses.

In view of uncertainties, GDP growth in 2020-2021 is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-2021 onwards. The growth factor would depend on how quickly the COVID curve flattens and begins to moderate. The combination of fiscal, monetary and administrative measures undertaken would create conditions for a gradual revival in economic activity in the second half of 2020-2021.


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