In an emergency measure, the US Federal Reserve, the American counterpart of the RBI, Tuesday cut interest rates by 50 basis points to battle the economic impact of coronavirus. The Fed’s decision to cut rates before its scheduled policy meeting March 17-18 reflects the urgency it accords to preventing possible global backlash of the pandemic. This is the first time in more than 11 years that the Fed has cut policy rates by 50 basis points. The move came just after the G7 central bankers issued a statement that they would use all policy tools in their command to achieve strong and sustainable growth, and safeguard against downside risks. Central banks in Australia and Malaysia have cut rates, while the Bank of Japan has taken steps to provide liquidity to stabilise its financial markets.
Earlier, the Organisation for Economic Cooperation and Development (OECD) had warned about the adverse impact of the coronavirus on the world economy. Sounding an alarm, the OECD said global GDP growth could plunge this year to as little as 1.5 per cent — almost half the 2.9 per cent rate it had previously forecast. It predicted that the downturn could be the ‘gravest threat’ to the global economy since the financial crisis more than a decade ago, from whose stranglehold the world is still struggling to emerge. In a downbeat assessment, the World Trade Organisation (WTO) also said it expected the disease to have substantial impact on the global economy. The outbreak could cause a domino effect, whereby global growth will be severely damaged in 2020 by the virus spreading throughout the world. Analysts have predicted a sharp fall in financial markets around the world, which could be as high as 20 per cent. Since the outbreak in January, the epidemic has infected close to 85,000 people.
Stock markets around the world have tumbled by more than 10 per cent — the worst week since the global financial crisis unfolded in 2008. Investors in India lost nearly Rs 11.5 lakh crore in the last week of February alone, as stocks fell like ninepins. The Reserve Bank of India Wednesday indicated that it is getting ready to take on the impact of the coronavirus on Indian economy. The bank said it is monitoring the situation and is ready to take action. The RBI may take a cue from the US Fed and announce cut in the lending rate. The bank should not wait for the next monetary review scheduled in April. It should announce a cut immediately. Now that the economy is headed for an unusual crisis, a 25 basis point cut may not be adequate. We hope the bank would take a cue from the US Fed and effect a 50 basis point cut in the repo rate. The RBI should infuse fresh liquidity into the system through a second round of long-term repo operations (LTRO). Under this, banks are financed at the repo rate of 5.15 per cent, far cheaper than the existing borrowing rates. This could help banks receive cheaper funds, which they can then pass on to consumers to stoke demand. Investors are adopting a risk-off approach and it is likely that there will be a flight of capital to safe havens. The government should also come out with policy measures to help industries and consumers. An economic stimulus is in order. Banks may be asked to make allowance for companies that have taken loans.