There isn't much space for an RBI rate cut, says former chief statistician Pronab Sen

The Reserve Bank of India (RBI) has undertaken liquidity measures, including another $2 billion worth of dollar swap and long-term repo operations worth Rs 1 lakh crore. Pronab Sen, the former chief statistician of India, in an interview with CNBC-TV18 shared his views on the central bank's measures to deal with the havoc caused by the coronavirus outbreak.

Sen said there isn’t that much space for a rate cut and the situation is such that a rate cut will have a direct impact on the system.

“The real question is that the danger of what is going on lies in the fact that what is going to happen, there is certainly going to be a slowdown but a lot of companies are going to be trying to get alternate sources of supplies for their inputs and costs are going to go up which means that for select customers the liquidity needs are going to go up,” Sen said.

He added that broad spectrum liquidity injection like long-term refinancing operation (LTRO) doesn't solve the problem.

“Some companies maybe withdrawing from the market because they are not getting supplies, they are cutting back on production and you are going to have other companies whose working capital needs are going to go up.

“If the banks are going to be rigid upon their borrowing limits then it doesn’t help matter very much,” he added.

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On the gross domestic product, Sen said: “As far as growth is concerned since all our quarterly numbers depend almost entirely on what is happening to corporate India, I think we are going to see a larger hit than we expect and that would be the case in terms of the real economy operation. So on the headline GDP numbers expect a bout of 50 bps drop, but the real economy is more resilient than that thanks to the informal sector.”

On the RBI rate cuts, he said, “The rate cut should be there. In fact, one of the things that the governor should have done and I am surprised he didn’t, is to essentially say that – I am calling the Monetary Policy Committee (MPC) now, we will discuss the matter.

“Whether he will announce a rate cut or not is of secondary importance because I do not think its essential instance, but at least to say that we have a legal restriction to rate cut and we are going to convene that and make that a regular affair instead of two monthly business,” Sen added.

Source: CNBC-TV18