Will RBI cut rates? Five questions answered on the central bank’s likely action

The Reserve Bank of India (RBI) has called a presser on Monday evening giving hopes to the financial markets that the Indian central bank may finally join its global counterparts to announce emergency monetary measures to cushion the local economy against the consequences of
coronavirus spread. The monetary policy committee (MPC), which sets the repo rate, is expected to announce a rate cut soon, according to most economists.

Here are five questions answered on the likely rate cut:

Can the RBI/MPC announce rate cuts outside the policy reviews?

Yes. The rate-setting panel doesn’t need to wait until the policy day to announce a rate cut if it is convinced that the prevailing situation warrants a rate action. In the past, the RBI had announced rate cuts outside the policy reviews taking into account the prevailing macroeconomic situation. But, this hasn’t happened for a long time now, especially after the RBI switched to a bi-monthly policy review.

Has Indian central bank announced emergency rate cuts in the past?

Yes. For instance, after the 2008 global financial crisis, India has undertaken pre-emptive rate cuts. That apart, there have been a few occasions when the central bank surprised the markets with unexpected monetary policy response responding to the inflation-growth dynamics.

Has the central bank already hinted about the likelihood of an emergency rate cut responding to coronavirus scare?

Yes. Early this month, in an interview with Bloomberg news, Das said the central bank is ready for a response “should the situation warrant. Also, there is a “strong reason for coordinated policy action" among the central banks in the context of the coronavirus problem. Das said this only hours before the US Federal Reserve slashed the interest rates by half a percentage point.

What has been the response by the global central banks so far?

Central banks across the globe have been slashing rates over the last few days in preparation to fight the coronavirus pandemic's impact on the economies. On March 15, the US Federal Reserve announced it would cut interest rates to zero and buy at least $700 billion in government and mortgage-related bonds.

Should the RBI announce a rate cut, what will be the impact on the financial system?

A likely 25-50 bps rate cut from the central bank will cheer the markets and offer more confidence to the market participants. The bond market has been expecting a rate cut for a while as indicated by the falling yields. But the banking sector is unlikely to pass on the rate cuts to the end consumer as the RBI and the government desire on account of demand slump in the economy. To that extent, rate cuts may not be proved effective beyond a sentimental booster for markets.