RBI needs to find room for rate cut to deal with impact of coronavirus

The RBI needs to find room for more rate cuts to deal with the impact of coronavirus on the economy, says IDFC Mutual Fund report.

The report titled 'The Coronavirus and Revealed Preferences' further said the RBI, on its part, has a dominant revealed current preference for bringing back credit growth.

"Again the revealed preference in MPC (on aggregate, not necessarily for each individual member) seemed to be to look for room to ease as soon as inflation allowed, even before the impact from the coronavirus had taken hold. With new evolving information, the nudge is likely to come sooner than before," the report said.

It is also noteworthy that the central bank chose to put out an assurance statement with respect to evolving developments, despite already being in the midst of substantial incremental non-traditional monetary easing, the statement said.

"All of this means that monetary policy, conventional and otherwise, will continue to play a pivotal role for now with consequent benefits for quality interest rates," it added.

The report pointed out that the finance minister's revealed preference is also similar to that of the RBI, i.e to get credit growth to rebound.

"This is also basis a recognition that scope for incremental fiscal response has been somewhat limited given the well documented constraints.

"In fact this space may get even further constrained if lack of growth buoyancy stresses tax growth and tepid financial markets stress capital receipts targets," it said.

The report, however added that it is unlikely that the government will compromise on spending to meet the fiscal deficit targets.

Noting that the global monetary policy will continue to be extremely supportive, it said in India too, the RBI's revealed preference will get a further leg up and conventional easing may start supporting unconventional tools already in deployment.

"Indeed the swap market is already pricing the next 40-50 basis points of repo rate cuts," it said.

The US Federal Reserve on Tuesday cut interest rate by 50 basis points to deal with coronavirus.

The virus has spread to over 60 countries and killed more than 3,100 people since its outbreak in the Chinese city of Wuhan in December. Over 90,000 have been infected.