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RBI didn’t announce a rate cut but provides liquidity relief amid Coronavirus scare; is it enough?

Even as the RBI didn’t announce an ‘emergency rate cut, it hinted at a possible cut in the next MPC meet.

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RBI will announce the first monetary policy for 2020-21 in the first week of April.

Even as the RBI didn’t announce an ‘emergency rate cut, it hinted at a possible cut in the next MPC meet. However, the RBI Governor Shaktikanta Das’ key objective seemed to assure the stock markets that the central bank has other tools in its kitty as well to boost the liquidity other than rate cuts, analysts said. The move may have been reassuring but much depends on the extent it would help stabilise the markets, M Govinda Rao, Chief Economic Advisor, Brickwork Ratings, said. “The action now is on the meeting of the Monetary Policy Committee, and we will have to wait to see the extent of the reduction in the policy rate, any reduction in CRR and/or any other policy initiatives”, M Govinda Rao added.

On March 16, 2020, the RBI announced two liquidity measures including another rupee-dollar swap to prevent any undue volatility in the exchange rate and additional LTRO to the extent of Rs 1 lakh crore to address any sudden liquidity requirements in the banking system. The RBI is expected to announce a 50 bps rate cut at its next MPC meeting on April 2, 2020, CARE Ratings said.

The RBI’s presser came a day after the US Federal Reserve cut rates to near zero. The Fed on March 15, 2020 slashed benchmark interest rate by a percentage point to near zero in an attempt to offset the negative impact of the COVID-19 outbreak on the US economy.  The Fed also purchased another $700 billion worth of treasury bonds and mortgage-backed securities. In addition, it entered into an agreement with five other foreign central banks, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, to cut their rates on currency swaps to keep the financial markets functioning normally.

“RBI has said that they are ready to mitigate the impact of coronavirus pandemic on the deteriorating economy and will act when the time comes. We hope it should not be the case of too little, too late. The RBI Governor also said was that the RBI has been taking some calibrated measures to ensure financial markets and institutions remain sound and resilient and keep domestic liquidity position comfortable. So, India Inc. will wait for the ‘right timing’ and quick action by the RBI, with the added hope that it is taken at an ‘optimum response’ point of time”, Niranjan Hiranandani, President, Assocham & NAREDCO, said.

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