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27 March 2020

India cuts rate, launches $50 billion economic aid package

The biggest rate cut since 2009 was accompanied by measures to boost banking system liquidity that adds up to INR 3.74 trillion ($50 billion) to support the financial markets and smoothen volatility

The RBI brought forward its Monetary Policy Committee meeting that was scheduled to start 31 March 2020/Bloomberg

by Bloomberg

The Reserve Bank of India (RBI) cut interest rates and announced steps to boost liquidity in a stimulus worth 3.2 per cent of GDP to counter the economic impact of the coronavirus outbreak.

Shaktikanta Das, RBI Governor said that the benchmark repurchase rate was slashed by 75 basis points to 4.40 per cent. The central bank also slashed the cash reserve ratio, the amount of deposits lenders must set aside as reserves, by 100 basis points to three per cent to boost liquidity.

The RBI brought forward its Monetary Policy Committee meeting that was scheduled to start 31 March 2020 and, in the process, joined in delivering surprise actions such as those by the Fed and other central banks to stem the economic fallout of the pandemic.

Targeted long term repo operations of up to INR 1 trillion and a three-month moratorium on loan repayments covering all banks and shadow lenders starting 1 March 2020 were part of the steps.

The decisions are by far the most sweeping steps by the central bank to support the economy and come a day after relief measures worth INR 1.7 trillion were unveiled by India’s finance minister.

Furthermore, India will also allow banks to trade in the offshore currency market in a step toward liberalising foreign-exchange trading.

RBI stated that banks operating out of the International Financial Services centre (IFSCs) will be allowed to participate in the non-deliverable forwards market with effect from 1 June 2020. The banks may operate via their local branches, foreign branches or their international banking unit in IFSCs.

India’s authorities are concerned a surge in rupee trading overseas threatens the stability of the currency, especially in times of stress. According to the Bank for International Settlements, that worry has intensified after London became the biggest centre for trading the Indian currency.

The average daily volumes for the rupee in the UK soared to $46.8 billion in April 2019, exceeding the $34.5 billion recorded in India. Volumes have also substantially jumped in other centres like Singapore, New York, and Dubai.

In response, India has been moving to make its onshore market more attractive and preparing to replicate offshore centres in specially designated financial zones within the country. Authorities have moved to allow local banks to offer foreign-currency transactions outside local market hours in January 2020.

RELATED STORIES: Reserve Bank of India COVID-19 IFSCs





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