Coronavirus outbreak: US Fed cuts rates by 50 bps, RBI ready to take action

In the wake of volatility in the financial markets due to COVID-19 (novel coronavirus), the Reserve Bank of India (RBI) on Tuesday said it was ready to ensure that the markets ran well and confidence was maintained. It is monitoring global and domestic developments.

RBI Governor Shaktikanta Das, in an interview to Bloomberg on Tuesday, said there was a strong reason for coordinated policy action. And the option before the RBI includes a rate cut and supporting the market through liquidity measures, building confidence, and other instruments to deal with emerging challenges.

Also, in a major step to arrest the economic fallout of coronavirus, the Federal Reserve cut its benchmark policy rates by 50 basis points (bps). This is the first time in over 11 years that the Fed has cut policy rates by 50 bps or more. The last time was in December 2008, when the rates were lowered by 75 bps. In the past 12 instances when rates were either hiked or cut, the extent of change was 25 bps.

“In the light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by ½ percentage point,” the Fed said in a statement. 

The Dow Jones index of the US was, however, down 310.41, or 1.16 per cent, as of 11:20 pm. 

The Fed’s move came just after the G7 central bankers issued a statement that they would use all policy tools to achieve strong sustainable growth and safeguard against downside risks.

As an indication of increasing coordinated action amid global uncertainties, the G7 finance and central bank chiefs held a meeting to find ways to counter the impact of COVID-19 on the global economy. G7 finance ministers and central bank governors said they were ready to cooperate further on timely and effective measures.

In a statement issued on Tuesday, the RBI said: “Globally, financial markets have been experiencing considerable volatility, with the spread of coronavirus triggering risk-off sentiments and flights to safe haven.” 

“Spillovers to financial markets in India have largely been contained.” 

Growing hopes of coordinated policy action to mitigate adverse effects on economic activity boosted market sentiment today (Tuesday), it added.

The outbreak of coronavirus and its subsequent spread to geographies across the world have adversely affected the financial markets.

In the past few days, central banks around the world have indicated the possibility of global coordinated action.

This prompted a recovery in the domestic as well global financial markets. The rebound on Monday in the domestic stock markets, which had shed 7 per cent in the past six sessions, stopped after the health ministry reported two new coronavirus cases the same day. Besides, an Italian tourist also tested positive for coronavirus in Jaipur, according to the Rajasthan government.

The BSE Sensex on Tuesday closed 480 points higher, 1.26 per cent, than its previous close following global market cues. Similarly, the Nifty50 index also closed 170.55 points, or 1.53 per cent, higher.

While the broader market showed some recovery, the rupee continued to weaken against the dollar. The rupee breached the psychological threshold of 73 to a dollar and closed at 73.29 on Tuesday, a 0.77 per cent fall from Monday’s close.

Referring to possible actions that the banking regulator can take, a State Bank of India executive said liquidity in the system was adequate. However, there could be room for sector-specific measures like ensuring funding as part of an overall support package by government and agencies. 

And, the units and companies affected by disruption may be given some dispensation (read relaxation) like forbearance in the treatment of loans.

Kristalina Georgieva, managing director of the International Monetary Fund (IMF), while addressing the Group of 20 meeting of finance ministers and central bank governors in Riyadh last month, had said all were hoping for a V-shaped, rapid recovery, but given the uncertainties, it would be prudent to prepare for more adverse scenarios.

The markets were eagerly awaiting the G7 central bankers’ call. There were expectations of a rate cut. “The expectation is that the rate cuts will be large. Anything less than 50 basis points will be taken negatively by the markets,” said a senior currency dealer.

A day after two fresh cases of coronavirus were reported in India, the Union health ministry on Tuesday issued a travel advisory suspending all regular visas/e-visas granted on or before March 3 to nationals of Italy, Iran, South Korea, and Japan who have not yet entered India.