RBI boosts liquidity, but no rate cut yet

The Reserve Bank of India (RBI) on Monday avoided an emergency interest rate cut akin to the steep rate cuts announced by various major global central banks to limit the economic fallout of the coronavirus and to assuage markets, but announced several measures to enhance liquidity in the system.

In a hurriedly called press conference, kept after market hours, Shaktikanta Das, RBI governor, announced another six months US dollar/rupee sell-buy swap on March 23 to limit rupee volatility and longterm repo operations (LTRO) in multiple tranches up to a total amount of Rs 1 lakh crore at the policy rate to enhance system liquidity.

State Bank of India chairman Rajnish Kumar, "The RBI decision to ensure additional liquidity through LTRO and swap transactions will ensure the twin objectives of further compression in term structure of interest rates and ensuring dollar liquidity."

Das also elaborated on the Yes Bank revival plan and the fallout of the Covid19 pandemic on the Indian economy and markets. At several times during the press conference Das asked Yes Bank customers not to rush to withdraw their money when the moratorium is lifted.

He also unequivocally supported private sector banks, stating that he has written to all state governments that "there is no reason for them (state governments) to stay away from private banks. The health of the banking sector is safe and sound."

"This time, the identity of the bank in difficulty, which is Yes Bank, is retained. If required, RBI will support Yes Bank with respect to liquidity. I would like to assure depositors their money is completely safe and there is no need for worry. In the history of Indian banking, depositors of schedule commercial banks have never lost money. After 6 pm on March 18, they can withdraw their money but there is no need for panic withdrawal," Das said.

On a question on why the rates were not cut, Das said, "According to the prevailing law, the rate cut call has to be taken by the monetary policy committee, but I don't rule out anything. Depending on the evolving situation, we will decide on the timing of our action." He reiterated that the RBI stands ready to take the necessary measures and has several tools at its disposal to address the impact of

Covid19 pandemic on the Indian economy, which could be deployed if required even ahead of the next monetary meet scheduled for March 31 to April 2. "Our response will neither be premature nor delayed," said Das.

Some of the major global central banks have announced multiple rate cuts and several monetary policy measures so far this month to limit the economic fallout of the coronavirus. As many as

43 central banks reduced rates, including the world's most powerful US Federal Reserve, which slashed its rates by 150 basis points to near zero just three days ahead of the FOMC meeting on Saturday. Following this, Bank of Japan brought forward its regular meeting by two days and announced a set of measures to support the economy hit by Covid-19, including doubling the pace of ETF and REIT purchases to 12 trillion yen and 180 billion yen per annum, respectively.

Madan Sabnavis, chief economist at Care Ratings said, "We expect the RBI to announce a 50 basis points rate cut at its next MPC on April 2,"