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Investors clamour for RBI rate cut but it may not be enough to soothe market's nerves

Investors clamour for RBI rate cut but it may not be enough to soothe market's nerves

Investors clamour for RBI rate cut but it may not be enough to soothe market's nerves
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By Ankit Gohel  Mar 19, 2020 4:10:01 PM IST (Published)

The Reserve Bank of India (RBI) is widely expected to reduce its key repo rate in the upcoming Monetary Policy Committee (MPC) meeting in April in line with the global central banks to tackle the grave economic situation caused by the outbreak of coronavirus.

The Reserve Bank of India (RBI) is widely expected to reduce its key repo rate in the upcoming Monetary Policy Committee (MPC) meeting in April in line with the global central banks to tackle the grave economic situation caused by the outbreak of coronavirus.

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However, the possible rate cut may not calm the financial distress and will have a limited impact on the markets, analysts said.
According to Neeraj Dewan, Director, Quantum Securities, the RBI is likely to cut interest rate by 50 bps given the need of the hour.
“The rate cut will ease the liquidity situation in the market a bit. However, it will not provide any major boost to sentiment. Stability in global markets is needed which can come only after we see any decrease or control in coronavirus cases globally,” Dewan said.
He also expected a reduction of Cash Reserve Ratio (CRR) by the central bank and added that steps from the government and regulator will boost confidence in the market.
Earlier, the RBI announced a slew of measures to pump liquidity into the system amid the continuous panic selling by investors across asset classes. The central bank decided to conduct open market operations (OMO) in the form of purchase of Government of India Dated Securities worth Rs 10,000 crore on March 20 with tenor between two and five years.
“With the heightening of Covid-19 pandemic risks, certain financial market segments have been experiencing a tightening of financial conditions as reflected in the hardening of yields and widening of spreads,” RBI had said on Wednesday.
The central bank also noted that it was important to ensure that all market segments remain liquid and stable, and function normally.
It also announced to carry out long-term repo operations in multiple tranches up to Rs 1 lakh crore and open another six-month dollar-swap window.
Sudip Bandyopadhyay, Director, Inditrade Capital, is of the view that along with monetary easing, the economy will also need fiscal easing to tackle this “unprecedented scenario”.
“Monetary easing takes time for the revival of economy. Fiscal incentives from the government by way of tax relief and other measures is also much important,” Bandyopadhyay said.
He added that the repo rate cut should happen as it is “critical for the RBI to act along with the central banks of other economies.
However, he does not expect a big market rally emanating from any RBI move but said that the measures taken by the central bank till now are good and necessary.
Moreover, to combat the economic shock from the coronavirus outbreak, Fitch Solutions expects the RBI to cut interest rates by 175 basis points during the FY21, up from earlier estimate of 40 bps reduction.
The fears of global recession has prompted central banks of major economies to come into action and announce emergency measures.
Meanwhile, the European Central Bank launched 750 billion euro (711.71 billion pounds) emergency bond purchase scheme in a bid to stop a pandemic-induced financial rout from shredding the euro zone's economy and raising fresh concerns about the currency bloc's viability.
Along with slashing its fund rate to 0-0.25 percent, the Federal Reserve also launched a new lending facility to backstop the money-market mutual-fund sector as part of a broadening effort to calm turmoil sparked by the novel coronavirus epidemic.
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