The Reserve Bank of India unexpectedly cut its key deposit rate on Friday, for the second time in three weeks, to discourage banks from parking idle funds with it and spur lending instead, to revive a flagging economy amid the coronavirus lockdown.
This week, Prime Minister Narendra Modi extended until May 3 a lockdown of the population of 1.3 billion as India’s tally of infections exceeded 10,000, despite the three-week shutdown ordered from March 24.
The RBI cut its reverse repo rate INRREP=ECI by 25 basis points to 3.75% with immediate effect, Governor Shaktikanta Das told a video conference. The rate had already been cut by 90 bps on March 27.
The central bank kept its benchmark lending or repo rate INREPO=ECI unchanged at 4.40% after a cut of 75 bps last month.
Since his last address on March 27, Das said, India’s economic and financial landscape has “deteriorated precipitously” in some areas.
“The surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI,” he added.
“In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed-rate reverse repo rate.”
Indian banks had been extremely wary of lending over the last few quarters as the economy cooled, and those fears have only increased in recent weeks as business activity collapsed.
Banks have parked 4.36 trillion rupees ($57.02 billion) on average with the RBI over the last three weeks, highlighting the extent of surplus rupee funds in the system.
“It is doubtful whether this flow can be stemmed easily,” said Joseph Thomas, head of research at Emkay Wealth Management.
“Banks are not lending or investing because they fear that under the current conditions they may be adversely impacted.”
Both the NSE Nifty 50 index .NSEI and the benchmark S&P BSE Sensex .BSESN, which had risen more than 3% in early trade, trimmed gains as Das spoke. The Nifty was last up 1.59% at 9,136.05 by 0827 GMT, while the Sensex was up 1.68% at 31,116.47.