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