SBI has suggested that a combination of larger rate cut and indirect tax rate cut could be the policy options.
As the global economy is hit due to weak industrial activity amid a rapid spread of coronavirus, the pressure to cut interest rates has also increased with time. While it is perceived that a cut in interest rates boosts demand, the State Bank of India doesn’t believe the same. “We believe that even though RBI might bite the bullet of cutting rates in forthcoming policy, it is unlikely to result in any material impact on invigorating demand,” said SBI Ecowrap report. SBI has suggested that a combination of larger rate cut and indirect tax rate cut could be the policy options with financial markets in an unprecedented global meltdown.
Why the government may not significantly cut petrol, diesel prices even amid freefall in crude oil prices
Apart from a rate cut, the demand can also be increased by lowering retail fuel prices while the global crude oil prices are on a freefall. The nearly 30 per cent fall in crude oil prices could lower the petrol prices by Rs12 per litre and diesel prices by Rs10 per litre in India from their present prices. A fall of $1 in crude oil prices will lead to 65 paisa decline in petrol prices and 52 paisa decline in diesel prices, shows SBI analysis. However, both the centre and states may not be willing to do so, as it may impact their overall revenue projection for FY20 given the fiscal constraints, according to SBI Ecowrap report.
Meanwhile, the most unexpected development in the global economy has been the sudden emergence of a price war between the OPEC and the non-OPEC members of the oil-producing countries. On top of it, the Saudi offer to reduce price and increase the production when the demand negating impact of coronavirus is still uncertain has taken markets by surprise. However, there is also a negative side of the falling oil prices. High financial market volatility, abrupt corrections in inflation and impact on government policies can take a toll on economic growth.