FILE PHOTO: A security guard’s reflection is seen next to the logo of the Reserve Bank Of India (RBI) at the RBI headquarters in Mumbai

By Swati Bhat

MUMBAI (Reuters) – The Reserve Bank of India on Friday slashed its key policy rate for a second time this year in an emergency meeting to counter the economic fallout from a nationwide lockdown to contain the spread of the novel coronavirus.

The central bank cut the repo rate by 40 basis points to 4%. The reverse repo rate was also reduced by 40 basis points to 3.35%.

In a video conference, RBI Governor Shaktikanta Das said the central bank’s Monetary Policy Committee (MPC) had voted to maintain its “accommodative” stance and members voted 5-1 on the quantum of the rate reduction.

“The MPC voted unanimously for a reduction in policy repo rate and for maintaining the accommodative stance of monetary policy as long as it is necessary to revive growth and to mitigate the impact of COVID-19 while ensuring that inflation remains within the target,” Das said.

India’s benchmark 10-year bond yield dropped as much as 18 bps to 5.85% immediately after the rate cut.

The RBI which had refrained from providing any outlook or projections on growth so far said the Indian economy is likely to contract in 2021 as economic activity has almost stalled due to the nationwide lockdown.

“The combined impact of demand compression and supply disruptions will depress economic activity in the first half of the year,” Das said.

“Given all the uncertainties, GDP growth in 2021 is expected to remain in the negative territory with some pick-up in growth impulses being seen in H2 2021 onwards,” he added.

Das also highlighted rising food price pressures from supply disruptions but said the MPC expects inflation to eventually fall below its medium-term target of 4% later in the year.

“If the inflation trajectory evolves as expected, more space will open up to address the risks to growth,” Das said.

(Additional reporting Nupur Anand, Abhirup Roy and Chris Thomas; Editing by Jacqueline Wong)