Calls are growing louder for the Reserve Bank of India (RBI) to reduce interest rates to stimulate economic growth in the aftermath of the coronavirus pandemic that is expected to take a heavy toll on global economic growth after wreaking havoc in world financial markets.
In the face of accelerating inflation, which has since slowed, the RBI has been in a pause mode since December after cutting its key repurchase rate five times in 2019, by a cumulative 1.35 percentage points 5.15%, to boost flagging economic growth.
Consumer price inflation in February was 6.58%. In the annual budget presented on February 1, the government estimated economic growth in the financial year to March 31 at 5%, the slowest pace in 11 years, but that was before the coronavirus assumed pandemic proportions..
At a press conference on Monday, RBI governor Shaktikanta Das acknowledged action by other central banks to reduce borrowing costs and boost economic growth. “Policy authorities have responded with emergency measures and more recently advanced economies have coordinated large policy rate reductions ,” Das said.
The next RBI policy meeting outcome is on 3 April, and Das is facing growing calls to join those central banks and announce monetary stimulus. The government of Prime Minister Narendra Modi too is being urged to provide for more economic stimuli.
“India cannot afford to wait for the pandemic to get over to assess losses caused by the virus and react accordingly. It has to take preemptive actions to keep the economy in good health and it must act now, taking the cue from other countries,” Delhi School of Economics professor Ram Singh said.
On Thursday, in his first address to the nation after the outbreak of Covid-19,Modi acknowledged the economic distress caused by the disease. The announced the formation of a high-level economic task force led by finance minister Nirmala Sitharaman to minimise the distress.
Monetary and fiscal stimuli will be key to revival of an economy in which tourism and hospitality and aviation have borne the brunt of fallout from the global pandemic and caused stock market indices to plummet by a fourth in the past two months; the rupee has depreciated 5% against the dollar since the beginning of this year.
Other governments and central banks have acted with greater alacrity in responding to the economic impact of the coronavirus.
The US government plans to give $1,000 per adult and $500 per child in direct money transfers as part of a stimulus package to help mitigate the economic impact of the crisis. In its recently approved $100 billion Covid-19 relief package, the US government included provisions for free testing of the disease and paid emergency leave. This also includes unemployment insurance for laid-off workers. The Federal Reserve cut its key interest rate by 1.5 percentage points to nearly zero in March, and announced measures to inject $700 billion into the US economy
The Bank of England has slashed its bank rate by half a percentage point to 0.25% to tackle the financial upheaval in the aftermath of the Covid-19 outbreak. The UK government has also announced a 330 billion pound ($398 billion) package of government-backed loans and guarantees to support businesses.
France has announced a 45 billion euro ($50 billion) aid package for small businesses and employees ,primarily through deferral of tax payments. It has also announced 300 billion euros of guarantees for bank loans to minimize the risk of bankruptcy for small and medium companies.
The extent of the impact of Covid-19 on India’s economy is not known. The economy had been slowing for many quarters before the virus hit.
“The Covid-19 is likely to impact India’s fiscal numbers in FY20 though it might be too early to say, possibly in FY21. However, it will be completely foolhardy to stick to any mandated fiscal rules in times of current crisis that is now threatening to rip apart the entire global financial ecosystem. Globally, state loans, income subsidies and tax deferrals are the most common fiscal packages being offered,” State Bank of India wrote in a report,
Industry has asked the government to act proactively. “There was a strong hope of recovery in the last quarter of the current fiscal. However, the new coronavirus epidemic has made the recovery extremely difficult in the near to medium term. The outbreak has presented fresh challenges for the Indian economy now, causing severe disruptive impact on both demand and supply side elements which has the potential to derail India’s growth story,” the Federation of Indian Chambers of Commerce and Industry said in a statement on Friday.
The finance ministry on Friday held a series of meetings with several virus-hit sectors and Sitharaman indicated that sectoral stimulus was on the way.
Associated Chambers of Commerce and Industry of India (ASSOCHAM) president Niranjan Hiranandani noted the action taken by central banks toi safeguard their economies. “India, being the fifth largest economy in the world, cannot be found lagging far behind in taking due rectifying actions in time.” The time, he said, is “perfectly ripe “ for the RBI to step in.
RBI governor Das said in an interview with Bloomberg earlier this month that he is ready to act to shield the economy from the coronavirus and reiterated there’s room to cut interest rates if needed. “We’re ready for a response should the situation warrant,” Das said. “Everyone likes a rate cut,” he added when asked if a coordinated response from global peers would lead to market pressure on him. “We will do what we think is right.”