RBI may need to aggressively cut rates alongside fiscal stimulus
The Indian government’s frugal economic stimulus package has put pressure on the Reserve Bank of India to intervene, as analysts and economists say measures announced so far are unlikely to have any meaningful impact soon.
A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, India July 8, 2019. REUTERS/Anushree Fadnavis/File Photo
The Indian government’s $ 266 billion economic rescue package outlined last week rests largely on boosting company credit for micro, small and medium enterprises (MSMEs), but it had scant new public spending, tax breaks or cash support to revive demand.
“The cumulative government measures will help partly ease the cash squeeze felt by MSMEs in the immediate term to help them bide time, but not fully resolve the current demand shock in the face of the coronavirus,” said DBS economist Radhika Rao. “With disinflation set to dominate, the RBI and policy committee will have the headroom to assume a growth-supportive stance.”
India went into the coronavirus pandemic amid falling growth and a sharp contraction in demand – both of which have been worsened by the pandemic.
Analysts said consumer demand is expected to be slow to pick up after the nationwide lockdown is lifted, most likely at the end of this month.
A Reuters poll showed the Indian economy is likely to suffer its worst quarter since the mid-1990s in the April-June quarter, shrinking 5.2%.
The only way to boost demand may be lowering interest rates to boost consumption, analysts said.
“Inflation is expected to fall off sharply in coming months towards the 2% range … Thus the RBI does have room to reduce rates,” said Sameer Narang, chief economist at Bank of Baroda.
The RBI cut interest rates by a sharper-than-expected 75 basis points in late March. Markets and economists now expecting at least another 75-100 basis points cuts in the remainder of this fiscal year.
“It remains to be seen how the RBI pushes for aggressive rate transmission, which still is at precariously low levels,” analysts at Credit Suisse said in a note.