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Indian central bank’s bazooka underwhelms

(ATF) India’s central bank has announced a slew of supportive measures, joining a global rush to alleviate the economic pain from the fast spreading coronavirus.

But markets fell despite these measures as only a marginal benefit was seen trickling down to businesses.

The Reserve Bank of India (RBI) advanced its monetary policy meeting that had been scheduled for next week and announced an effective 90bp rate cut, plus liquidity injections and a wider policy rate corridor to support the economy.

Asia’s third biggest economy is currently under a nationwide lockdown effective for 21 days, which was announced on Wednesday.

The RBI cut its policy repo rate to a historical low by 75bps to 4.40% and the reverse repo rate was cut by 90bps to 4%, widening of the policy corridor.

The reverse repo cut makes it unattractive for banks to park money with the RBI and therefore the interest rate reduction was effectively 90bps, Rahul Bajoria of Barclays said.

Bajoria called it “kitchen sinking” the policy response, saying the RBI had stopped short of directly indicating any intention to buy bonds or provide lines of support to the government.  

“We still see policy rates declining to 3.50% by August 2020, with risks of front-loaded cuts. We currently expect another 50bp in June, followed by 40bp at the August meeting,” he added.

The central bank also announced liquidity injecting measures like a cut in banks’ cash reserve ratio, a targeted long-term repo operation (TLTRO) and allowing banks to dip deeper into their Statutory Liquidity Ratio (SLRs).

The combined effect would add funds up to 2% of GDP or 3.7 trillion Indian rupees.

The RBI also allowed banks to deal in offshore non-deliverable rupee derivatives markets and announced a 3-month moratorium on all term loans outstanding on March 1.

The measures appear dramatic given India’s low amount of coronavirus cases, Priyanka Kishore of Oxford Economics said, referring to the country’s infection ratio of 0.4 cases per million of population.

“It is highly probable that the low numbers are, in part, due to very little testing,” she added.

While the measures will bring relief to the economy, it is also alerting markets to the extent of the economic damage and the severity of the problem.

“We have downgraded India’s FY21 GDP to 3.8%, the lowest since the global financial crisis,” ANZ economists Rini Sen and Sanjay Mathur said in a note while observing that additional steps need to be taken.

“We expect more measures, both on the fiscal and monetary side to be announced subsequently. Fiscally, we expect more stimulus to address businesses and specific sectors like aviation, tourism and small business. On the monetary front, we expect the RBI to continue to bat with full force, including more rate cuts and unconventional policies that include sector-specific assistance and even deficit financing of the budget.”

Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai


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