Indian stocks see volatile trading after the central bank cuts rates to ‘mitigate’ coronavirus impact

The Reserve Bank of India (RBI) logo is displayed outside of the bank’s headquarters in Mumbai, India, on Tuesday, Aug. 9, 2011.

Kainaz Amaria | Bloomberg | Getty Images

Indian shares were volatile in trading Friday after the central bank slashed interest rates to mitigate the coronavirus impact on the economy, following a meeting that was brought forward to this week.

The Nifty 50 index wavered between gains and losses: It traded up 0.38% at 2:27 p.m. HK/SIN after climbing more than 4% and then dropping 1% earlier in the session. The S&P Sensex index was down 0.7%, retracing previous advances of more than 3%.

The rupee strengthened against the dollar to around 74.69, up from levels near 74.77. 

The Reserve Bank of India’s Monetary Policy Committee met this week and cut the repo rate — or the rate at which it lends to commercial banks — by 75 basis points from 5.15% to 4.4% on Friday. Originally, the central bank was scheduled to meet next week and the interest rate decision was due on April 3. 

“After extensive discussions, the MPC voted for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy, as long as necessary to revive growth, mitigate the impact of COVID-19 while ensuring that inflation remains within the target,” RBI Governor Shaktikanta Das said in a press briefing. 

The RBI also reduced the reverse repo rate — or the rate at which banks lend to the central bank — by 90 basis points to 4% to make it more unattractive for banks to “passively deposit funds with the Reserve Bank” instead of lending them to productive sectors of the economy, according to Das. Other measures to inject liquidity into the system were also announced. 

Das added the current situation is “unprecedented” and that everything hinges on “the depth of the COVID-19 outbreak, its spread and its duration.” In its policy statement, the central bank said if the situation worsens, it would have “adverse implications for India.”

India is currently in a three-week lockdown that began this Wednesday as part of its efforts to control the coronavirus outbreak, which causes the respiratory illness COVID-19. Finance Minister Nirmala Sitharaman announced an economic stimulus package worth more than $22 billion on Thursday to help households that would be disproportionately affected by the lockdown. 

The RBI’s decision on Friday put it on a similar path as its peers — other central banks have eased their monetary policies to help support their economies from the coronavirus pandemic that has infected more than 500,000 people worldwide. 

“At this point in time, the onus is clearly on the RBI to nurse the economy back to health,” Kunal Kundu, India economist at Societe Generale, said in a Wednesday note before the central bank’s decision Friday.

“We think market-watchers will be more focused on how RBI uses non-interest tools to support struggling corporates as cash flows dry up and the dollar shortage starts to sting,” he added.

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