RBI Expected to Follow Suit Fed's Emergency Rate Cut But Experts Doubt Its Impact
Economists say that rate cuts are unlikely to tackle the economic crisis led by coronavirus. The RBI must take bolder actions
The US Federal Reserve has gone all in to combat the economic fallout of coronavirus. Termed as an emergency measure, the US central bank on Sunday slashed the rates by one percentage point, bringing it down in the range of 0 to 0.25 per cent.
This is the second emergency rate cut—after 50 basis points (bps) cut on March 3—within a short span of two weeks by the central bank of world’s largest economy. The last time it slashed rates all the way to the bottom was a decade ago during the global financial crisis.
As part of the emergency action package, the Fed also promised to increase its holdings of treasury securities and agency mortgage-backed securities by at least $700 bn. In addition, the central banks of Canada, England, Japan, Europe and Switzerland announced a coordinated action to enhance liquidity by means of US dollar liquidity swap line arrangements.
As policy makers globally sweep into action to counter the impact of coronavirus, there’s an air of the Reserve Bank of India (RBI) following suit. Rumors around a rate cut ran rife today after the central bank Governor Shaktikanta Das announced a press meet earlier in the day, but nothing came of it.
Rate Cut Expected but Experts Question its Impact
“Responding to the global coordinated effort, the RBI is highly likely to cut rates, but it’s not a given,” says Sunil Kumar Sinha, principal economist at India Ratings. “The central bank doesn’t have a large window for a policy rate cut given that the repo rate is already at 5.15 per cent.” The RBI has kept the repo rate unchanged in the last two monetary policy reviews.
Deepak Jasani, Head - retail research, HDFC securities says that rate cut might not be enough. “RBI may cut rates to infuse sufficient liquidity in the system, but beyond a point rate cuts may lose their potency and the government will have to start fiscal spending to stimulate demand,” he says.
Sinha concurs and explains that the rate cuts in the last one year have not yielded expected results. “The benchmark repo rate has been lowered by 135 bps in the last one year but it hasn't made much of a difference to either consumption demand or investment demand,” he says. RBI data shows that credit impulse—change in new credit as a percentage of the GDP—in the last one year has progressively declined, while consumer demand also remained tepid. Also, rate transmission following the rate cuts has been slow.
“Another rate cut will hardly make any difference,” says Sinha. From the market perspective, the industry players are more interested in knowing the central bank’s stance on the economic crisis than what its policies do on ground, he adds.
In line with global financial markets, Indian stock market indices have been turbulent in the last 8-9 days. Today, the BSE Sensex tanked 2,713 points to close at 31,390 and NSE Nifty lost 758 points to close at 9,197. Businesses across tourism, airlines, hospitality, trade and manufacturing sectors have been hit hard as countries impose travel bans. “The US, UAE, Germany, UK, Singapore, Italy and China, among others, fall into the top destinations for Indian engineering exports and are the largest contributors to the country's basket of merchandise exports. Trade is crippled in most of these destinations due to a near collapse of global supply chain,” says Ravi Sehgal, Chairman of Engineering Export Promotion Council (EEPC).
The RBI initiated action against impact of COVID-19 on the economy last week by opening a six-month US dollar-INR sell-swap window for $2 bn. Today he announced conducting long term repo operations (LTRO) in chunks of upto INR 1 lakh crore in order to boost liquidity in the banking system. "The LTRO and swap announcements by RBI were expected, given the global environment and actions by other central banks," says Mihir Vora, Director and Chief Investment Officer, Max Life Insurance.
Experts expect the central bank to take more such bold moves. “Rate cuts will be part and parcel of global coordinated effort and may also reassure market participants. But, over and above this what the RBI really needs to do is ensure that the overall inflow and outflow of capital along with the liquidity available in the system is managed in a way that you don't see abrupt rise or fall in, say exchange rates,” says Sinha.
The Monetary Policy Commission (MPC) is set to meet in April to decide on rate cuts.
RBI Governor Assures Domestic Liquidity Comfortable
As opposed to industry’s expectations, Das did not announce a rate cut in today’s press briefing. However, he assured that the RBI will take necessary steps to mitigate effects of coronavirus pandemic on the Indian economy and ensure that the financial markets and institutions in India continue to function normally.
“Second round of effects of the pandemic could operate through a slowdown in the domestic economic growth and it would obviously be a result of synchronised slowdown in global growth and as a part of that, the growth momentum in India would also be somewhat impacted,” he said during the conference. However, domestic liquidity conditions remain comfortable, he added.