17 March 2020
The Economy Observer
Can Coronavirus help achieve long-pending structural changes?
RBI should resist cuts in policy interest rates
As the Coronavirus (COVID-19) rampages its way across the world, the US Federal Reserve, along with several other
major Central Banks such as the European Central Bank (ECB) and the Bank of England (BoE), have cut interest rates to
an all-time low, complementing it further with quantitative easing (QE). The President of the US has declared national
emergency and Italy – the world’s 8th largest economy – has expanded its quarantine to the entire country.
Accordingly, global financial markets are in turmoil and crude oil prices have crashed, raising the debate on whether the
RBI should cut rates. In a press conference on 16 Mar’20, the RBI Governor, Mr. Shaktikanta Das, announced another
USD/INR swap and additional LTROs worth INR1t. However, in line with our hopes, the RBI did not succumb to pressure
and resisted rate cuts. We believe that the monetary policy is highly inappropriate to address the supply-side
disruptions caused by COVID-19; instead, targeted short-term/temporary macro-prudential measures for affected
sectors/industries will certainly be more effective.
Additionally, we argue that COVID-19 presents an opportunity to implement some long-pending structural changes in
the country, which would go a long way in improving our economic strength. In this note, we discuss (a) How
historically an epidemic/pandemic helped bring about structural economic changes, and (b) What sort of structural
changes could be adopted in the Indian economy today?
Overall, the adverse economic effects of COVID-19 are unavoidable. Moreover, the regulators must also ensure that
whatever support is provided – to mitigate the impact – is not only temporary but also highly short-term in nature.
Interest rate cuts, therefore, must be resisted and any fiscal response should be extremely targeted and quickly
COVID-19 has spread its reach to almost the entire world economy. The US Fed
reduced its policy interest rates by as much as 1.5pp this month and also announced
large bond-buying program as well. The ECB and the BoE followed suit along with
several other Central Banks in the world. Further, Mr. Donald Trump has declared
national emergency, many top educational institutes in the US have shifted to online
classes and Europe is now the epicenter of COVID-19. Accordingly, the US 10-year
bond yield is trading comfortably below 1% currently, global equity markets have
plunged and crude oil prices have crashed to about USD30/bbl. In this backdrop, a
debate has emerged on whether the RBI should also reduce interest rates or a
general fiscal stimulus should be announced?
Monetary policy is highly
inappropriate to address
the supply-side disruptions
caused by COVID-19;
however, targeted short-
prudential measures for
will be certainly more
Since the US Fed Chairman has already clarified that rate cuts will do nothing to
address the supply-side distortions led by Coronavirus, there is not much to add on
the (in)effectiveness of monetary easing in the face of current risks. We believe that
the RBI’s move to ensure ample liquidity on 16
Mar’20 was right. The RBI
announced another round of USD/INR swap and additional LTROs worth INR1t,
however, it resisted cutting rates. Further, we expect the Monetary Policy
Committee (MPC) to resist cutting rates next month as well, since rate cuts are
neither short-term nor targeted in nature. Further, there exists many other
fundamental reasons (discussed
to resist sharp monetary easing in the Indian
economy. In a nutshell, we believe that monetary policy is highly inappropriate to
address the supply-side disruptions caused by COVID-19; however, targeted short-
term/temporary macro-prudential measures for affected sectors/industries will be
certainly more effective.
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.