Spreading Coronavirus Risks Raise Prospects Of India Rate Cut

The global spread of the coronavirus, along with the detection of an increased number of local cases, have raised the prospects of an emergency monetary policy action in India.

The U.S. Federal Reserve has cut its benchmark fed funds rate by 50 basis points, joining a host of central banks that have stepped in with emergency measures. Reserve Bank of India Governor Shaktikanta Das has said he’s ready to act to shield the economy from the coronavirus and reiterated there’s room to cut interest rates if needed.

JPMorgan economists see the possibility of the MPC following the Federal Reserve and other central banks in preemptive easing of monetary policy. The research house expects export growth to take a hit in the January-March period, given high correlation between global growth and local exports. This would weigh on the modest recovery expected in the Indian economy in the fourth quarter of the current financial year and open the door for further interest rate cuts, they argued.

The MPC cut rates by 135 basis points in 2019 but paused in December due to a spike in inflation. The turn of events since then may give the rate-setting committee room to cut rates sooner than expected, said Suyash Chowdhury, head of fixed income at IDFC Asset Management.

“The revealed preference in MPC (on aggregate, not necessarily for each individual member) seemed to be to look for room to ease as soon as inflation allowed, even before the impact from coronavirus had taken hold. With new evolving information, the nudge is likely to come sooner than before,” Chowdhury said in a note on Wednesday.

The Indian economy has been slowing for the last two years, with growth seen sliding to 5 percent in 2019-20. In the October-December 2019 quarter, GDP growth slipped to 4.7 percent from a revised 5.1 percent. The weak growth has come alongside a spike in inflation, led by higher food prices.

Assessing the precise impact of the virus on growth is difficult at this stage, said Rahul Bajoria, chief India economist at Barclays. “There is nothing dramatically different at this point and there would be no economic rationale for the RBI to cut rates in an inter-meeting move,” Bajoria said. “If at all, the RBI does panic and cuts rates, it would act more like an insurance if and when conditions worsen.”

The central bank, according to Bajoria, could choose to add more liquidity via its long-term repo operations to counter any nervousness in the market. The central bank has already committed to infusing Rs 1 lakh crore at the repo rate for tenors of one-three years.

Even if the MPC chooses to stay away from an inter-meeting move, the probability of a rate cut at the next meet in April has risen, said Sameer Narang, chief economist at Bank of Baroda. “As is, it is still too early to expect an inter-meeting rate cut from the MPC. Given the global monetary policy stance, however, there is a more than 50 percent chance that the MPC will cut rates in its next scheduled meeting on April 4, 2020, conditional on how the situation evolves between now and then,” Narang said.

Some economists and analysts are starting to pare down growth forecasts for India and have turned cautious on the consumer sector.

“We believe the recovery is likely to be delayed further,” said Kapil Gupta, economist at Edelweiss. “This is primarily on two counts. First, if the coronavirus spreads further in India, activity will be disrupted. Second, exports will take a significant hit as the global economy is slowing down (PMIs have faltered),” Gupta said. The research house has scaled back FY21 GDP growth projections by 20-30 basis points to 5.5 percent.

Gautam Chhugani, analyst at Bernstein, said it’s time to become more cautious.

“It may be time to be more cautious about India and watch for a scenario where certain pockets in India could have multiple cases (double- or even triple-digit cases) leading to disrupted daily affairs, domestic travel and even potential shut down of retail and business,” Chhugani said. “The RBI could step in with a rate cut but that tool (like in many parts of the world) is losing effectiveness to solve the structural deficiencies of the economy.”