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Last Updated : Mar 18, 2020 11:55 AM IST | Source: Moneycontrol.com

RBI ready for a rate cut, but will it boost the mood on the Street?

In light of the cuts by major central banks of the world, the RBI may go for a 50-55 bps rate cut in the coming monetary policy review. However, an element of surprise is there.

The Reserve Bank of India (RBI) looks poised for a rate cut in the coming monetary policy review scheduled to be held from March 31 to April 3.

The expectations of a rate cut have grown stronger as major central banks across the world have affected rate cuts to provide liquidity to their respective economies.

In a press conference on March 16, RBI hinted that there is a possibility of a cut.

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"I'm not ruling out any possibility on the rate cut. We are estimating the impact of Covid-19 and we will give our growth estimates in MPC. India is relatively insulated from the global value chain, but there will be some impact," RBI Governor Shaktikanta Das had said.

In light of the cuts by major central banks of the world, the RBI may go for a 50-55 bps rate cut in the coming monetary policy review. However, an element of surprise is there.

"MIBOR-OIS spread one year is at 4.63, citing the market's expectation of rate cut of at least 55 bps. We believe that already pegged in rate cuts do not have much impact on the markets, but a surprise could help," said brokerage firm Edelweiss Broking in a report on March 16.

Edelweiss is of the view that the central bank should go for a 65 bps rate cut to infuse some positivity in the sentiment of the market.

"RBI should opt for a rate cut to the tune of nearly 65 bps, bringing the repo rate to 4.5 percent and with one year forward inflation expected at 4 percent, India's real interest rate would be at 50 bps," said Edelweiss.

Edelweiss believes RBI has enough room to achieve it with the prevailing coordinated monetary policy action across the globe. "In times like this, we also believe RBI could opt for flexible inflation targeting, Edelweiss added.

Will a rate cut lift market's mood?

Experts say the impact of a rate cut may be minimal on investor sentiment.

For example, recent rate cuts by the US Fed failed to cheer the market and Wall Street witnessed sharp losses after that.

The underlying issue with the market and economy need to be addressed. While the global economy was already moving with a sluggish pace, thanks to the US-China trade war and geopolitical worries, the outbreak of Covid-19 has worsened the situation.

India cannot keep itself aloof from what is going on in the global markets and experts say while a rate cut is expected, the central bank and the government will have to come out with more fiscal measures to support the economy which will bolster the mood of the market.

Arun Kumar, Market Strategist at Reliance Securities said: "A reduction in interest rates by the central bank may not offer the desired result immediately and directly to the economy."

However, Kumar added that when a rate cut is combined with any positive fiscal measures or even an announcement of direct fiscal measure will induce the much-required confidence for the economy to move up in the long run.

Sony Mathews, Senior Market Strategist at Geojit Financial Services has a similar view.

"The effectiveness of such a rate cut to boost the market will be limited as the Indian stock market sentiment is currently in sync with global markets," Mathews said.

"We are heading for a global slowdown and with the Indian economy still failing to fully transmit the previous rate cuts, a rate cut, although desirable, will not be very effective to boost the market in a meaningful way," Mathews added.

What should be done?

RBI's role at this juncture is important. Not only the rate cuts, but the central bank will also have to come out with measures that must ensure stability in the financial market.

Analysts indicate that the rate cuts globally are being used to quell any symptoms of credit freeze in the financial system. To that extent, this is more of a stop-gap measure which will keep the financial markets functioning till the real economy recovers from the effects of Covid-19.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities said that contrary to the global financial crisis, which was had its roots in global financial sector, the current scenario is more due to underlying dislocations in the real economy which is getting impacted due to various restrictions and quarantines.

"Monetary stimulus is unlikely to alleviate the pain in the real economy. To that extent, the RBI’s role will also be crucial in keeping financial markets functioning and preventing any domestic credit freeze. More than the cost of liquidity, the availability of liquidity is more important," said Rakshit.

A combination of monetary and fiscal measures is required to underpin the domestic economy.

"While the RBI may cut rates to assuage financial markets’ concerns, it will be all the more important to ensure that liquidity reaches the sections that will be most affected by Covid-19 domestically. This will require a combination of monetary and, more importantly, fiscal measures to ensure minimal dislocations in affected sectors,” Rakshit added.

At this juncture, it seems the sentiment of the market will remain low unless normalcy returns and the issue of coronavirus comes under control.

"RBI has already played its part in terms of providing liquidity to both bond and currency market. RBI rate cut can be a supportive sentiment booster at this juncture. However, it is the government efforts in terms of normalising the trade and people movement which will be the key ahead," said Pankaj Pandey, Head – Research, ICICI direct.

Monetary policy only plays a supporting role and fiscal policy will be the real catalyst.

However, timely and targeted monetary action will act as a stabilizer for financial markets and arrest possible damage to the real economy, said Edelweiss.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Mar 18, 2020 11:54 am
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