RBI unexpectedly cuts key rate by 40bps to 4.0% in May

At a press conference held on Friday, the Reserve Bank of India (RBI) Governor Shaktikanta Das unexpectedly announced a cut to the key repo rate by 40 basis points (bps) to 4.0% while the reverse repo rate was also slashed by 40bps to 3.35%.

Key quotes

MPC voted unanimously in policy rate reduction.

MPC voted in 5-1 ratio for rate reduction.

Global markets generally disconnected from developments in real economy.

Domestic economic activity severely impacted by two-month lockdown.

Collapse in demand seen in both urban and rural segments.

Fiscal revenues have taken a hit.

Private consumption has seen biggest blow from COVID-19.

Ray of hope also comes from forecast of a normal monsoon.

Inflation outlook has become complicated.

Food inflation that had eased from January peak has reversed and surged due to supply disruptions.

Market reaction

Indian rupee remains on the offers, little affected by RBI’s surprise decision. USD/INR clings to gains near two-day highs of 75.85, at the time of writing.

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