The coronavirus outbreak has seen markets the world surrendering to turmoil and volatility. Last week, US indices plummeted and ended a 11-year bull run, entering bear territory. Stocks elsewhere from the UK to Japan fell similarly as investors scrambled amidst the surge of disquiet over whether the world was prepared to handle the pandemic. In India, trading was halted on Friday on market open – before stocks rebound to end in green and then free-falling again in the next session.
In these uncertain times, Central Banks are stepping in to quell the uncertainty and calm markets and investors.
The US Federal Reserve on Sunday cut its key target rate to near-zero, a move reminiscent of steps it took in the wake of the Great Recession over a decade ago.
Following the Fed, Central Banks in New Zealand, Japan and South Korea, with Australia followed with monetary easing of their own. The UK had already cut its rates and the EU, whilst not cutting rates, announced other relief measures. This coordinated global effort also involved liquidity injections aimed at stabilising confidence as the coronavirus pandemic threatened a global recession.
Cut Another Day
The RBI has not (yet) followed the steps undertaken by its peers in the US and UK and announced an emergency rate cut to combat the coronavirus crisis, which has rattled markets across the world. Instead, it has sought to provide liquidity relief and assure investors that it has other tools to support the economy, whilst hinting at a rate cut in the next Monetary Policy Committee (MPC) meet on April 2nd.
On March 16th, the Central Bank announced two liquidity measures including another rupee-dollar swap to prevent any undue volatility in the exchange rate and additional long-term repo operation (LTRO) to the extent of ?1Lcr ($13.4bn) to address any sudden liquidity requirements in the banking system.
The big question, however, is whether these measures will be sufficient to pacify investor sentiment and outlast the crisis (Read more about Epidemics, Economic Growth and Stock Market Performance – An Historical Perspective). Things like broken supply chains can't be mended overnight by monetary interventions. The effects of the coronavirus pandemic will persist even after the lockdowns and restrictions have been lifted. Whether rate cuts and liquidity boosts will propel markets swiftly back to normalcy or not remains to be seen.
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