RBI Stays Away From Emergency Rate Cut, Addresses Liquidity Concerns 

The Reserve Bank of India on Monday announced measures to ensure adequate liquidity in foreign exchange and money markets, even as it stayed away from an emergency interest rate cut.

The RBI will undertake targeted measures to counter the market risks emerging from the spread the coronavirus, Governor Shaktikanta Das said.

The RBI announced that it will:

• Conduct another round of six month sell-buy U.S. dollar swap operations worth $2 Billion on March 23.
• Will carry out long-term repo operations worth up to Rs 1 lakh crore at the benchmark policy repo rate. The first tranche of LTROs up to Rs 25,000 crore will be conducted on March 18 for a three-year term.

Details on these measures will be released by the regulator soon.

According to Das, it is important that policy space is used appropriately, suitably timed to optimise impact. He didn’t rule out an interest rate cut but stayed away from any clear signal that such a decision may come before the next monetary policy meet in April. “We are not ruling out anything,” Das said when asked whether they would allow other central banks in announcing emergency rate cuts.

Bond market saw yields swing wildly. Yields fell sharply intraday in expectation of a rate cut only to move back up by close of trade.

“If a central bank calls for a press conference in the middle of the worst financial crisis since 2008, you expect something more substantial,” said Abheek Barua, chief economist at HDFC Bank. Barua added that something more substantial — a such as an interest rate cut or forbearance for impacted sectors — was expected.

Sameer Narang, chief economist at Bank of Baroda said that the RBI is likely to continue injecting durable liquidity in the system to ensure transmission of already announced interest rate cuts. According to Narang, the MPC could cut the repo rate by 50 basis points on April 3, when the committee is scheduled to meet next.

The steps announced by the RBI are the second intervention to keep domestic forex and money markets functioning smoothly. Last week, the RBI had announced a $2-billion forex swap to ensure that the foreign exchange market is adequately supplied with dollars. It also offered short-term rupee liquidity, which saw no takers.

Major central banks have stepped up emergency actions to deal with the dislocation in financial markets and counter the economic impact. Overnight, the U.S. Federal Reserve slashed its fed funds rate by a percentage point to near zero and promised to boost its bond holdings by at least $700 billion. The Fed, Bank of Japan, European Central Bank, Swiss National Bank, Bank of Canada and Bank of England also announced swap lines to support the international supply of the world’s reserve currency.

Worsening Economic Outlook

Growth in the Indian economy has slumped over the last two years. For the financial year 2019-20, GDP growth is expected to settle at below 5 percent. In its first estimate of growth in 2020-21, the RBI had said that growth might pick up to 6-6.5 percent.

That outlook has been muddied by both global and now local spread of the novel coronavirus.

COVID-19 could impact economic activity in India directly through trade channels especially in sectors like electronics, pharma, drugs , chemicals etc where the exposure to China is relatively high, said Das.

Estimates from economists suggest that just the impact of lower global growth could shave off 40-100 basis points from domestic growth, after accounting for some positive impact of lower oil prices. Standard Chartered Bank pared its growth estimate for 2020-21 from 5.6 percent to 5 percent, fearing a hit from the global and local spread of the virus.

Das declined to specify the expected hit to the Indian economy.

“There is considerable uncertainty about the duration of the pandemic and the currently available estimates of its adverse effects will undergo sizeable revisions if this coronavirus persists longer or if gets contained much earlier than currently believed,” the RBI Governor told reporters.

Growth conditions could weaken dramatically if the virus continues to spread locally. In a recent note, JPMorgan said the impact of a local spread of the virus would flow through the services sector. Discretionary, non-government services in India constitute about 33 percent of the gross domestic product. These have been growing at 8 percent a year. If one assumes that growth rate for this second half halves, it could shave off 130 basis off GDP growth, the research house said.