India Cuts Rate, Unleashes $50 Billion Stimulus In Virus Fight
(Bloomberg) -- The Reserve Bank of India cut interest rates and announced steps to boost liquidity in a stimulus worth 3.2% 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%, Governor Shaktikanta Das said Friday 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% to boost liquidity.
Bonds rallied, while the rupee and stocks gave up gains on concerns about how much firepower the RBI will be left with after these big bang announcements. The yields on benchmark 10-year bonds fell as low 5.98%, the lowest since 2009, the rupee was trading little changed at 75.11 per dollar after gaining as much as 1.1% earlier, while the nation’s stocks fell after rising as much as 3.9% initially.
“A war effort has to be mounted,” Governor Das said. “It is worthwhile to remember tough times don’t last, only tough people and tough institutions do.”
The RBI brought forward its Monetary Policy Committee meeting that was scheduled to start 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.
The biggest rate cut since 2009 was accompanied by measures to boost banking system liquidity that adds up to 3.74 trillion rupees ($50 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 loan repayments covering all banks and shadow lenders starting March 1 were part of the steps.
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 were announced by Finance Minister Nirmala Sitharaman.
“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.”
Should conditions worsen, the RBI still has more weapons in its arsenal, including directly buying sovereign bonds or providing lines of support to the government, according to Rahul Bajoria, senior economist at Barclays Plc.
“We believe these may still be required,” Bajoria said. “The RBI may have to ultimately provide the government with either liquidity lines or outright purchase of government securities, depending on the how the situation evolves.”
What Bloombergs’ Economists Say...
In our view, the RBI’s bazooka is likely to support immediate solvency and liquidity issues. Still, the national lockdown in place will 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 spreads.
-- Abhishek Gupta, India economist
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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.
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% 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%-6% 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.
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