From YES Bank failure to oil crash: How India can deal with myriad of risks

India’s central bank and government will need to raid their policy toolkits to respond to a myriad of global and domestic risks threatening an economy in the grip of a prolonged slowdown.

On top of the coronavirus outbreak and the oil-price crash, India was rocked last week by the biggest bank rescue in its history. With the rupee now close to hitting a record low, policy makers will need to step up monetary and fiscal support to restore investor confidence. Analysts say an emergency interest-rate cut, more liquidity, and a cash injection for banks may be needed.

“The task before policy makers is to maintain financial stability and ensure growth doesn’t slow down sharply from a weak starting point,” said Prasanna Ananthasubramanian, chief economist at ICICI Securities Ltd. in Mumbai.?

The failure of Yes Bank Ltd., the nation’s fourth-biggest private lender, and a decision to write down some of its bonds, will further curb credit in an economy already suffering a cash crunch because of a shadow-banking crisis. That’s pulled down economic growth to an estimated 5% in the fiscal year through March, the weakest in more than a decade.

The volatility in oil adds a new layer of risk just as the economy was showing nascent signs of a rebound. While lower prices will benefit India since it’s a major importer of crude, global demand will take a knock, weighing on export and investment growth.

Deeper Cuts
The credit crunch and oil-price collapse open the door to bigger interest rate cuts than initially projected.

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