As the US Fed Reserve significantly cut interest rates by 50 basis points amid coronavirus fears, RBI may also come in-line with a similar decision. The coronavirus outbreak has caused turbulence in the global economy. “The outbreak of Coronavirus has disrupted economic activity in many countries and has prompted significant movements in financial markets. We are beginning to see the effect on the tourism and travel industry and are hearing concerns from industries that rely on the global supply chain,” said Federal Reserve Chair Jerome Powell. The spread of coronavirus has brought new challenges and risks to the financial market and the magnitude and persistence of the overall effect on the economy remains highly uncertain, he added.
RBI Governor Shaktikanta Das said that the central bank is ready for the situation and he expects some decision among the central banks of the large economies, including India. However, amid a high inflation rate in India, the Reserve Bank has been reluctant to cut the repo rate in the last two MPC meet.
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“Back home, the RBI also released a presser on the same lines today but that did little to subside market panic on Covid in India. We note other Asian central banks have already been easing on account of expected supply-led growth disruptions, while the RBI has been stealth easing via LTROs, partly as high inflation inhibited conventional easing,” said Madhvi Arora, Economist, Edelweiss Securities. However as we argued post another sluggish GDP print last week, RBI could now front-load its impending rate cuts and could further the LTROs by as early as end-March, she added.
Meanwhile, it is believed that other central banks may follow suit very soon after the US Fed cut the rates by a larger-than-expected margin. Speaking about India, the RBI had slashed the interest rates consecutively five times in the last calendar year and at an elevated level of inflation, the RBI’s decision to further reduce the repo rate will be a tough one. Also, it will be interesting to learn how much monetary policy can help amid an epidemic.
“Coordinated action of global central bankers brings back memories of the historic plaza accord of 1985 when major central banks agreed to let the USD weaken to spur one of the biggest engines of global growth. However, how effective a monetary policy action could be in times like these is debatable,” said Abhishek Goenka, Founder & CEO, IFA Global.