RBI may cut key interest rates by 175 bps in FY21 to combat economic shock from coronavirus outbreak: Fitch Solutions

This easing of inflation towards the lower band of the RBI's 2-6 percent target range over FY2020/21 would provide room for the central bank to ease monetary policy significantly.

Press Trust of India March 18, 2020 11:35:48 IST
RBI may cut key interest rates by 175 bps in FY21 to combat economic shock from coronavirus outbreak: Fitch Solutions

New Delhi: Fitch Solutions on Wednesday said it expects the Reserve Bank of India (RBI) to cut key interest rates by 175 basis points during the fiscal year starting 1 April, up from earlier estimate of 40 bps reduction, to combat the economic shock from the coronavirus outbreak.

It forecast India's real Gross Domestic Product (GDP) growth to pick up slightly to 5.4 percent in 2020-21, from its estimate of 4.9 per cent in the current fiscal.

"We at Fitch Solutions now expect the RBI to cut its key policy rates by 175bps by end-FY2020/21 (April–March), versus 40bps previously," it said.

RBI may cut key interest rates by 175 bps in FY21 to combat economic shock from <span class=coronavirus outbreak Fitch Solutions" width="380" height="285" />

Representational image. Reuters.

This would take the policy repurchase (repo) rate to 3.40 percent and 3 percent, respectively, from 5.15 percent and 4.75 percent at present.

According to Fitch Solutions inflation is expected to ease significantly over the coming months on the back of the ongoing oil price war and also easing food inflation from improving food supply as the winter (Rabi) harvest feeds through from February.

This easing of inflation towards the lower band of the RBI's 2-6 percent target range over FY2020/21 would provide room for the central bank to ease monetary policy significantly.

"We expect the RBI to ease heavily at the first instance it sees inflation easing, given that high inflation has previously limited its ability to ease its interest rates in line with other major global central banks," it said.

The number of deaths around the world linked to the new coronavirus has reached nearly 8,000.

The number of novel coronavirus cases in India has risen to 147 on Wednesday, with 10 fresh cases reported from various parts of the country, according to the Health Ministry.

Fitch Solutions said the number of coronavirus cases in India is "likely to surge given the high population density in its cities and poor healthcare access, particularly for its large rural population."

Given the likelihood of the coronavirus pandemic to worsen globally and domestically, it saw downside risks to its forecast due to further work disruptions and also an external demand shock.

Fitch Solutions revised downwards its forecast for India's inflation to an average of 3 percent in 2020-21 fiscal as compared to 3.5 percent previous estimate.

According to Fitch Solutions, the decline is primarily due to sharp fall in global oil prices from about $50 per barrel to about $30 due to a price war started by Russia and Saudi Arabia on 8 March.

Headline inflation in India has already begun to show signs of easing, coming in at 6.6 percent in February, from 7.6 percent in January, on the back of slowing food inflation.

To deal with COVID-19 induced slowdown, major global central banks have already held emergency meetings and announced steep monetary easing measures.

"We believe that the RBI is also likely to follow suit and implement steep monetary easing as soon as possible over the coming meetings to support growth when inflation eases back within its 2-6 percent target range," Fitch Solutions said adding the central bank could also inject liquidity into the system through an easing of its cash reserve ratio and/or other measures over the coming months.

The RBI earlier this week announced another round of six-month USD sell/buy swaps worth $2 billion to provide liquidity to the foreign exchange market on 23 March, and up to Rs 1 lakh crore worth of long term repo operations at the benchmark policy repo rate.

"Risks to our forecast are toward further easing than we currently expect. With high inflation having limited the RBI's ability to ease interest rates over the past several months, the central bank may now have to resort to 'big bang' easing measures in a bid to play catch up to its global counterparts in its effort to counter the economic shock from the COVID-19 outbreak," it added.

Updated Date:

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