India central bank slashes rates, warns of contraction

MUMBAI (AFP) – India’s central bank slashed interest rates yesterday in an effort to contain the economic fallout of the world’s largest coronavirus lockdown and warned the economy could contract this year.

Even before almost all activity shut down in late March, Asia’s third-largest economy was struggling to gain traction with sluggish growth, record unemployment and banks reluctant to lend.

The Reserve Bank of India (RBI) slashed the repo rate, the rate at which it lends to commercial banks, by 40 basis points to 4.0 per cent, the second cut this year.

“The impact of coronavirus is turning out to be more than expected. Gross domestic product (GDP) growth is estimated to remain in negative territory in 2021,” bank governor Shaktikanta Das told an online news conference.

“RBI will continue to be vigilant and will take whatever measures are needed to be taken due to COVID-19 pandemic,” Das added.

The RBI also lowered the reverse repo rate, the rate at which it borrows from commercial banks, by 40 basis points.

The bank had cut the repo rate by 75 basis points in March as fears grew over the spread of the virus in the country of 1.3 billion people.

Recent data have also set alarm bells ringing.

Last month the purchasing managers index (PMI) of activity in the services sector suffered its sharpest contraction since it began in 2005, while inflation soared to 8.6 per cent.

Das said the global economy was headed towards a recession because of coronavirus-induced disruptions to supply chains.