Indian Central Bank maintains key rate and lowers reverse repo rate

US, WASHINGTON (ORDO NEWS) — The Reserve Bank of India (RBI, the country’s central bank) did not change the key interest rate at a meeting on Friday, but lowered the reverse repo rate and announced additional measures to support liquidity in the financial system in the context of the coronavirus pandemic. The repo rate (base interest rate) was maintained at 4.4% per annum.

The rate on reverse repurchase transactions was reduced by 25 basis points (bp) to 3.75%. It is assumed that a reduction in this rate will reduce the incentive for commercial banks to place funds in RBI and encourage them to increase lending to companies and homeowners.

In addition, the Central Bank plans to channel 500 billion rupees ($ 6.51 billion) to support the corporate bond market through a new round of long-term target repos.

The RBI also announced that it has softened reserve requirements for potential losses on bank loans and has instructed financial institutions to “freeze” dividend payments in order to preserve capital to respond to the negative effects of coronavirus on the economy.

Banks will not pay dividends until the end of the current fiscal year ending March 31, 2021, said RBI head Shaktikanta Das. “It is imperative that banks save capital in order to be able to support the economy and absorb losses in the current conditions of heightened uncertainty,” Das said in a television statement on Friday.

The Indian Central Bank will return to the consideration of dividend payments by banks after September 30.

Das noted that inflation in India is likely to fall below the Central Bank’s medium-term target of 4% by the second half of the current fiscal year, and this will provide RBI with room for maneuver that “should be used efficiently and on time.” These words were regarded by experts as a signal that the Indian Central Bank could again lower the base interest rate. In March, the rate was immediately reduced by 75 bp, to the minimum for 10 years, 4.4%.

In March, inflation in India was 5.9%.

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