Modi explores spending boost to contain coronavirus fallout

By Anirban Nag and Vrishti Beniwal

India’s central bank pledged to use its record $481 billion foreign-currency arsenal to stem a market rout that’s threatening growth in an already-slowing economy.

The Reserve Bank of India wants to keep the rupee stable and will continue using long-term repurchase operations and other liquidity tools at its disposal, according to an official, who asked not to be identified in line with the bank’s rules. The RBI announced a $2 billion injection into the foreign-exchange market Thursday to support the rupee, and followed Friday with a plan to add liquidity through short-term repurchase operations.

The assurances came a day before wild swings in Asian global markets Friday, with the rupee plunging to a record low and trading in Indian equities halted for 45 minutes after the main indexes plunged 10%. The currency and stocks later pared losses.

Policy makers are being pushed to increase stimulus to help the economy cope with the coronavirus outbreak and the failure of one of the nation’s biggest private banks. Market speculation had been growing for an off-cycle RBI interest-rate cut, but the official ruled out a move before the next scheduled decision April 3.



The collapse of Yes Bank is weighing on the nation’s growth outlook as credit markets dry up. It’s likely to snuff out any hopes of a quick recovery in India’s shadow lending sector, which has been struggling for the past 18 months.

“India is caught in very strong crosscurrents,” said Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics in Singapore. “Credit conditions look set to remain tight following developments at Yes Bank. At the same time, the economic damage from the virus is unlikely to be negligible, especially if it triggers a global recession.”

Prime Minister Narendra Modi’s office also is exploring the need for higher spending to prop up growth, according to people familiar with the discussions. Authorities estimate the virus will shave about 30 basis points off India’s growth target of 6%-6.5% for the fiscal year starting April 1.



The central bank got some good news Thursday as inflation data showed price growth easing for the first time in seven months, to 6.6% in February.

There’s scope for RBI to consider the impact of moderating inflation, Chief Economic Adviser Krishnamurthy Subramanian told reporters in New Delhi on Friday. The government and RBI are working in tandem and will respond whenever needed, he said.

The slump in oil prices is an added benefit for India, the world’s third-largest crude importer. “If the decline in oil prices is allowed to completely pass through to retail markets, we estimate this could pull headline CPI down by at least 100 bps in the second quarter of 2020,” said Rahul Bajoria, an economist at Barclays Plc in Mumbai.

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