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20 countries cut their rate in March, trying to mitigate the impact of the coronavirus. And it would have been very easy for the RBI Governor to merely follow the herd and cut rates.

But RBI showed a lot of maturity by using other weapons in its arsenal to inject liquidity into the system. At this point of time, given the scare among the people, a rate cut would not have helped much as no one was going to rush to buy a car or a house. Instead, what was needed was to put in more liquidity so that the Indian economy can grow from within, domestically, and to get that growth, in these troubled times, it was imperative to have more money in the market.

Cutting rates would not have made any difference except for the market, which knows and understand only a rate cut. Its an evolving situation and the RBI might need to come out again and probably it does not want to spend all its bullets from the war chest immediately. The RBI knows that its an extraordinary situation and it has assured us today that whenever the situation demands, it will be ready with more. The Governor has sent the message across today that ensuring there is enough liquidity in the system in more important than cutting rates.

What RBI has done instead:

Second round of 6-months sell-buy US dollar swap operations on March 23rd.

This is a move in the right direction as it will ease the pressure on the rupee. Over the past few days, the rupee has been beaten down and it happens every time a situation of risk aversion arises. Last week, RBI announced a $2-billion swap for six months and today’s announcement in the second round. This helps anchor the rupee vis-à-vis the dollar – the RBI will sell dollars on 23rd March and will buy them back either six months later or maybe roll over.

To carry out Long Term Repo Operations (LTRO) worth up to Rs.1 lakh crore at policy rates.

Under LTRO, RBI gives 1-to-3 year loan to banks but at the prevailing repo rates. Collateral is govt securities of similar tenure. This will actually help in better transmission of the 139 bps rate cuts it has given since Jan 2019. More importantly, it will bring down the yields for shorter-term securities in the bond market. When banks get infused with low-cost funds and to perk up credit offtake, this is the best way to bring down rates on loans.

Thus RBI did the right thing today. Ensuring transmission of the past rate cuts through liquidity and keeping a handle on the rupee are excellent moves in these troubled times.

There is more to RBI than merely cutting repo rates; lets understand that the RBI has more tools and instead of knee-jerk, sentiment boosting fiscal measures, it is doing what is actually required. And yes, if this also does not work, on 3rd April or even before that, more actions, a rate cut will also follow.

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