MUMBAI (BLOOMBERG) - The Reserve Bank of India cut interest rates and announced steps to boost liquidity in a stimulus worth 3.2 per cent of gross domestic product to counter the economic impact of the coronavirus outbreak.

The benchmark repurchase rate was slashed by 75 basis points to 4.40 per cent from 5.15 per cent, Governor Shaktikanta Das said on Friday (March 27) after an emergency meeting of the rate-setting panel. The RBI also cut the Cash Reserve Ratio, the amount of deposits lenders must set aside as reserves, by 100 basis points to 3 per cent to boost liquidity.

The biggest rate cut since 2009 was accompanied by measures to boost banking system liquidity that adds up to 3.74 trillion rupees (S$71 billion), support the financial markets and smoothen volatility. Targeted long term repo operations of up to 1 trillion rupees and a three-month moratorium on repayment of term loans for all banks and shadow lenders starting March 1 were part of the steps.

"A war effort has to be mounted and is being mounted to combat the virus involving conventional and unconventional measures in a continuously battle ready mode," Governor Das said, adding that the rate cut is aimed at supporting economic growth for as long as is necessary and to mitigate the impact of Covid-19. "It is worthwhile to remember tough times don't last, only tough people and tough institutions do."

The decisions are by far the most sweeping steps by the central bank to support the economy, and come a day after relief measures worth 1.7 trillion rupees announced by Finance Minister Nirmala Sitharaman. The RBI brought forward its Monetary Policy Committee meeting that was scheduled to start on March 31 and in the process joined in delivering surprise actions such as those by the Federal Reserve and other central banks to stem the economic fallout of the pandemic.

"This is RBI's whatever it takes moment," said Sujan Hajra, chief economist at Anand Rathi Shares & Stock Brokers. "This would not necessarily promote growth but avert a collapse, so a big positive."

The yields on benchmark 10-year bonds fell as low 5.98 per cent, the lowest since 2009, after the RBI's steps. The rupee advanced 1 per cent against the US dollar to 74.44, while the nation's stocks fell after rising as much as 3.4 per cent initially with the S&P BSE Sensex down 0.4 per cent and the NSE Nifty down 0.9 per cent.

Abhishek Gupta, Bloomberg's India economis, said: "The RBI's bazooka to slash interest rates and boost liquidity in the economy is likely to support immediate solvency and liquidity issues. Still, the national lockdown in place will continue to hurt consumption and investment demand. And the actual growth outlook will be determined not by RBI's policy shots, but more by how the virus behaves.

Prime Minister Narendra Modi's government imposed a three-week long nationwide lockdown that started Wednesday for its 1.3 billion people, in the most far-reaching measure undertaken by any government to check the virus's spread. The government's spending plan announced Thursday included cash transfers to the poor and steps to ensure their food security.

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The shutdown will halt all non-essential consumption and push the economy toward contraction in the April-June quarter, Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note. India's economy, which expanded 4.7 per cent in the quarter ended December, hasn't seen a contraction in at least two decades, based on official data adjusted for different base years.

The RBI had cut interest rates five times last year, and had paused since December citing high inflation. While price-growth remains above the upper end of the RBI's 2 per cent-6 per cent target band, falling oil prices will help to curb price pressures. Das also said underlying inflationary pressures are likely to ease due to waning demand in the economy.