With the US Federal Reserve cutting lending rates for the second time in less than two weeks to battle woes of impending recession amid coronavirus scare, the Reserve Bank of India (RBI) might soon follow suit. RBI Governor Shaktikanta Das has called for a press conference at 4 pm on Monday, and speculations are rife that the central bank might opt for a rate cut to boost consumption and avoid a freeze in financial markets.
The US Federal Reserve on Sunday cut the benchmark borrowing rate to a range of 0-0.25 per cent, where it was during the 2008 global financial crisis, and pledged to keep it there "until it is confident that the economy has weathered recent events." Many global central banks, including those in England, Australia, New Zealand and the European Union have also effected similar rate cuts to ward off recession fear.
Usually, decisions on rate cuts are taken during RBI's bi-monthly monetary policy committee (MPC) meeting. The next MPC is scheduled to be held from March 31 to April 3. However, with Indian stock markets on a boil, extending the global rout on COVID-19 fears, the central bank might have felt the pressure of stepping up.
On Monday, Sensex plunged more than 2,000 points and Nifty is trading below 9,300. The rupee, too, is wobbling, hitting a record low of 74.50 per dollar on Friday, before recovering. It was again trading low at 74.20 in early trade on Monday.
On the other hand, the eased wholesale price index (WPI)-based inflation figures, released on Monday, also give some leeway for the RBI to slash lending rates. As per the latest government data, WPI inflation softened to 2.26 per cent in February on the back of cheaper foods and vegetables, compared to 3.1 per cent in January.
In December, 2019, the central bank had suddenly pressed the pause button, after effecting five consecutive rate cuts between February and October last year, owing to inflationary pressures. With rising onion and vegetable prices, inflation had breached RBI's comfort levels back then. Currently, repo rate stands at 5.15 per cent and reverse repo rate at 4.90 per cent.
In addition, reduction in crude oil prices across the globe will also mean easing pressure on inflation. A repo rate cut will imply less lending costs, which will result in a spurt in economic activity, resulting in improved consumption rates.
The RBI on Thursday announced measures to infuse liquidity in the foreign exchange market, including the US dollar swaps worth $2 billion. Under the swaps, banks will buy US dollars from the RBI and simultaneously, agree to sell the same amount of the American currency at the end of the swap period.
