Coronavirus Pandemic: Will an Emergency RBI Rate Cut Help India?

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The recent outbreak of coronavirus has shaken everyone to the core. Not only is the disease spreading at an inexorable pace, but so are its consequences—especially the economic slowdowns in various countries.

While the doctors are trying to curb the pandemic itself, the governments are focusing on reducing its strain on the economy and financial markets.

According to the latest economy news, on March 04, the US Federal Reserve witnessed a policy rate cut of 50 base points, which was further reduced to zero on Sunday. Following this, many other countries like Japan, Indonesia, Australia, etc. are now starting to adopt the same measures to tackle their economic imbalances.

Amidst all the precautionary actions being taken by governments globally, the Reserve Bank of India has not yet stepped up to do the same. Instead, the RBI is focusing more on the rupee and dollar liquidity.

CAN POLICY RATE CUTS BRING SOME RELIEF TO THE ECONOMY?

Many economists and analysts find the proposal of RBI rate cuts to be an efficient tool in fueling the economic pace. They consider the step of the Federal Reserve as a “signal” to initiate a coordinated rate across the globe.

So, do the RBI rate cuts make sense?

Before answering the question, one needs to understand the various factors that will affect the introduction of these rate cuts in the Indian economy. Let’s study them one by one.

1.   Inflation

In most of the countries, their inflation rates can be seen lying within the target rates. It is because they are opting for policy rate cuts. On the other hand, India has lost control over it, and thus the inflation is comparably high in the country.

2.   Negative Supply Shock

Secondly, as per the Indian economy news, the current nature of the supply shock in India is inclining towards the negative side, which means the supply is decreasing, and the prices are reaching the skies.

3.   Depreciation of INR

Furthermore, the value of the Indian rupee has faced vast amounts of depreciation against the US dollar. The FPI account outflows in fear of COVID-19 news have adversely affected the strength of the Indian rupee.

4.   Increasing Excise Duties

Although the crude prices are getting low, the government keeps on elevating the excise duties on petroleum products, which nevertheless is keeping the petrol prices high.

GOVERNMENT’S RESPONSE AND CALL FOR ACTION

After considering all these points, the impact of RBI rate cuts doesn’t seem to matter much in the present situation of our country. The RBI is still planning to reduce the rate by 50 base points in April 2020, in hope for the much-needed financial support.

The government’s response to the economic slowdown, especially after the national lockdown, has been limited to introducing liquidity in the financial markets and strengthening the rupee.

1.   INR/USD Swap Auction

To facilitate rupee liquidity in the Indian market, the RBI has decided to buy US dollars worth $5 billion from the banks and to pay them in rupees. This step will introduce cash worth INR 35,000 crore in the system.

2.   Long Term Repo Operations

The government has also infused INR 1,00,000 crore through the long-term repo operation, in four installments.

3.   Other Measures

To spread the liquidity in the markets, the government is taking additional measures, like seeking aid from the National Health Financial Corporation.

By ruling out policy rate cuts, the government, till now, seems to have taken correct preventive measures since the break of COVID-19 news. But the road ahead is filled with hurdles. Unfortunately, the situation can worsen The lockdowns have just been initiated, and the economy is going to suffer. But with appropriate actions and facilitated liquidity in the financial market, India can still control the situation better than other countries.