RBI joins Global Central Banks to revive the economy

Backdrop

Global markets are in a lurch as the coronavirus scare has sent it into a nose-diving frenzy. The world is witnessing simultaneous developments on the virus outbreak – China, the epicentre, of the virus outbreak is returning to normalcy with restoration of commercial activities while other regions like Europe & Asia continue to report incremental identification of cases.

Amid the ruckus created by the virus outbreak, the Saudi-led oil price war has only added fuel (no pun intended) to the fire. Oil prices have dribbled down to ~$30 a barrel levels – perhaps the steepest decline since the 1991 Gulf War. While this is primarily a positive development for India from a perspective of a reduced oil import bill and headroom to generate tax revenues through the headroom created between prevailing on-ground prices & the reduced market price. However, as a word of caution, this may have deflationary effects on the already slowing economy. Having said that, the softened inflation will afford the central bank enough room for a rate cut.
Central banks, globally, are acting in sync to revive the economy through various policy measures & spending. While this may simply be a band-aid to a gunshot, the degree of helpfulness of policy measures is an exploration reserved for another note.

The U.S. Fed led the easing exercise by cutting policy rates to almost zero along with releasing a $700bn quantitative easing programme. Global counterparts including the central banks is New Zealand, Japan, South Korea, Bank of Japan, and the European Central Bank are taking coordinated measures to infuse liquidity into economies to keep them afloat.

Back Home

RBI Governor addressed the nation around the episode developing around Yes Bank and how does the central bank intend to deal with the economic slowdown.

Key announcements included:

Yes Bank

Yes Bank depositors are reassured that their deposits in the bank are safe and the bank will resume operations on 18th March’20, 6pm. There is no need for a panic withdrawal of funds. The governor stated that depositors have never lost their deposits in a scheduled commercial bank and this time won’t be different. The governor also assured that Yes Bank has enough liquidity and will offer support as and when required.

Policy Measures

The governor acknowledged that the first-order effects of the coronavirus outbreak are seen in travel-related sectors like airlines, tourism and hospitality. The extent & duration of the pandemic is unknown, but RBI has acknowledged and intimated intent to address the situation through a couple of measures. While Governor Das has assured of closely monitoring the situation, he has also reassured that the central bank is well-equipped and will intervene as and when appropriate.

1. RBI proposes to conduct another six-month USD/INR sell-buy swap on 23rd March’20 to provide liquidity to foreign exchange markets as selling pressure intensifies amid panic.
2. Long-Term Repo Operations (LTRO) to be conducted up to a total amount of INR 1 Lakh Crore at policy rate, in multiple tranches to further bolster liquidity in the Indian economy.

Though there was no rate cut announcement, evolving dynamics support a higher probability of a 25-35 bps rate cut.

Investor Takeaways

1. Equities, especially large-caps, seem to have reached a reasonable price point to enter. This does not mean that we have hit the bottom & it is time to go bottom-fishing but given the current levels, now would be a great time to step-up SIPs/STPs in equities. Entering multicap funds should augur well for investors with a horizon of ~5 years.
2. For debt fund investors, the increased probability of further softening of the yield curve as an effect of global softening & synchronised Indian policy measures (e.g. LTRO, probability of rate cut) opens up a sweet spot for debt funds with an average effective maturity in the 5 to 7 years range. Investors with a slightly higher risk appetite may choose good dynamic bond funds. We continue to maintain our view to steer clear of credit risk – in fact, investors should try having a meaningful exposure to sovereign debt along with the AAA-rated corporate bonds.

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