Notwithstanding widespread expectations, the Reserve Bank of India (RBI) has decided to wait a while for effecting a rate cut, even though the spreading coronavirus has prompted central bankers of countries across the globe to adopt emergency measures
While not ruling out anything in terms of action, the RBI governor has announced fresh injection of Rs one lakh crore into the system via long-term repo operations (LTRO), spread over multiple tranches. This clearly suggests that the continued focus in these trying times would be on liquidity easing measures. As in its earlier LTRO attempt, the primary objective this time too appears to be on providing durable liquidity at reasonable cost. This move, just like its earlier LTRO, is bound to have a fall-out on short-duration bond yields.
The governor also announced a six-month dollar-rupee sell/buy swap on March 23. The intention is to steady the depreciating rupee. Read in tandem, both these measures are liquidity easing and management initiatives. Given the fact that any decision on rate squarely falls within the domain of the Monetary Policy Committee (MPC), the governor did well within the central bank’s ambit to roll out proactive measures.
The governor conceded that the second round of impact of coronavirus could operate through a slowdown in the domestic economic growth. This slowdown, he felt, could be the consequence of synchronised slowdown in global growth. That Shaktikanta Das and the MPC still chose not to cut rates outside a monetary policy review cycle clearly has come as a huge disappointment for many. The next MPC review is a clear two weeks away.
Nevertheless, the governor, to a question at an unscheduled press briefing, asserted that “we do not rule out anything”. A moderation notwithstanding, the retail inflation is still above the RBI red line. To that extent, the MPC will be highly constrained in taking a rate cut action.
At the moment, the RBI has correctly chosen to await the MPC review meeting. And, in the meanwhile, it has chosen to further inject liquidity in the system by other assorted tools available for it. Rate cuts in the past have met with very poor transmission even in the face of poor credit off-take.
Surprisingly enough, governor Shaktikanta Das opened the press briefing by first focusing on the trouble-hit Yes Bank rather than the escalating coronavirus and its telling effect on the Indian economy. Asserting that a unique private-public partnership rescued Yes Bank, he assured the depositors their money was safe and that the identity of the private lender would remain in tact.
Somewhere it becomes clear that the RBI alone can only do so much to blunt the economic effects of a COVID-19 pandemic. Or perhaps, as some have suggested, the central bank is merely choosing to keep its gunpowder dry in case the situation in India worsens over the next to weeks.
With global supply chains hit badly, relief can only come in the form of quick policy reaction at the fiscal level to repair it. If the supply chain continues to be hit for a longer period, should the Coronavirus not subside sooner, then it will have further implications on production and consequently prices. The MPC has to factor in this aspect when it convenes later this months for a review meeting.
On its part, the government will also do well to pick less and leave more in the pockets of individuals. In a scenario where there are fast-evolving developments, a boost to consumption can happen only this way.
K.T. Jagannathan is a senior business journalist.