As US Fed cut interest rate to near zero amid Coronavirus scare, here’s what it may mean for India

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March 16, 2020 12:58 PM

After the US Federal Reserve cut interest rates to near zero, analysts expect the Reserve Bank of India (RBI) to also lower rates in the next monetary policy due on April 3, 2020 especially amid the Coronavirus scare.

The US 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.

After the US Federal Reserve cut interest rates to near zero, analysts expect the Reserve Bank of India (RBI) to also lower rates in the next monetary policy due on April 3, 2020 especially amid the Coronavirus scare. At a time when the world is facing a pandemic situation, restarting the quantitative easing package is a big boost to the global economy, the analysts also said. “These measures will at best be a palliative for the forms which are pressurized by debt and face problems in supply chains. IT cannot boost growth or investment. For RBI it does look like that if by April the spread is prodigious in the country leading to official shutdowns in some states, there would be an aggressive cut in rates”, Madan Sabnavis, Chief Economist, CARE Ratings, told Financial Express Online.

The US 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. 

“The markets were concerned about the widening FRA-OIS spread. The humongous liquidity injection is intended to tackle that. The Fed has also lowered the emergency borrowing facility for banks by 150bps to 0.25%. It has cut Reserve Requirements to zero and has announced swap lines in coordination with other major global central banks to lower the cost of USD funding by 25bps”, Abhishek Goenka, Founder & CEO, IFA Global, said.

However, the latest move by the US Fed doesn’t mean much to others. The decision is only expected to add up to the panic in the current scenario, Rajan Chakravarty, Economist and Product Strategist at Metropolitan Stock Exchange (MSE), told Financial Express Online. “This cut was completely futile and a waste of good ammunition by the US Fed. As supply dries up in response to the Coronavirus a demand side move of this sort means little except add to the panic. One hopes the othèr Central banks do not follow suit  with similar wasteful moves”, Rajan Chakravarty added.

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