Rate cut losing its potency as an instrument to stimulate growth: Analysts

People remain a little skeptical on how much rate cuts can aid economic recovery at a time when coronavirus is getting a tighter grip on the world

In a bid to battle the economic fallout emanating from deadly Coronavirus (Covid-19), the US Federal Reserve (US Fed) cut its benchmark policy rates by 50 basis points (bps) in the range of 1 to 1.25 per cent on Tuesday. However, the emergency rate cut failed to cheer investors as US stocks tumbled. Market participants worried whether pumping more money into financial markets would address the central problem – a cut in business activity as workers and consumers stay home.

Back home, the Reserve Bank of India (RBI) said on Tuesday it was ready to ensure that the markets ran well and confidence was maintained. It is monitoring global and domestic developments.

Here's a look at what market analysts think about the developments:

Deepak Jasani, Head Retail Research, HDFC Securities

Basically, rate cut as an instrument is losing its potency. Despite so many rate cuts, growth resurrection has not happened across the globe. So, central banks and governments have to think about fiscal stimulus to stimulate growth rather than just rate cuts. Easy liquidity and rate cuts are not helping in their traditional purpose. As far as markets are concerned, the concerns will continue... maybe the rate cut will have a slightly delayed impact. People remain a little skeptical on how much it can aid economic recovery. Overall, it may not have a very big impact, I feel. Markets can see a bounce in the short-term, which may not sustain for long.

So, what kind of fiscal stimulus is needed then? In spending lies the answer to this question – that is spends by governments on various social, infrastructure and other avenues. But, I don't know how many countries have that leeway right now. The developed countries have some leeway but the emerging economies are in a tighter situation where they may not be able to do a lot of spending.

Sudip Bandyopadhyay, Group Chairman at Inditrade Capital

I think the uncertainty continues. The US Fed has cut rates rather aggressively. That said, the virus has been spreading over the last few days. The market is not reassured and it realises that there's nothing much coming in the immediate future to battle this health scare. So, whatever had to come has come and under the circumstances. 

Economic indicators have been alarming. China's Service PMI has come in about 25, manufacturing at 35. Under these circumstances, the global markets are being very cautious, guarded and a bit negative. India will follow its global peers. 

There will be some excitement around the Reserve Bank of India (RBI) cutting interest rates and it may happen soon. If rate cut does materialise, there will be a little bit of excitement in financial services stocks – banks and NBFCs – and may be a little bit in realty as well. But, beyond that, I think we will battle this health scare for a long time till there is an effective solution.

That said, there are various concerns also how much the rate cuts can force or influence people to go and spend money or get back into economic activities because it has limited stimulus in these kind of circumstances.

I think if the RBI cuts rate, the rupee should stabilise as the US Fed has already cut rates. I don't think it has much room for further sharp depreciation. In the near term, I see rupee between 72.75 and 73.25 and in the medium term, I will go back to around 72 levels.