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MOSL: ECOSCOPE-Can Coronavirus help achieve long-pending structural changes?

ECOSCOPE: Can Coronavirus help achieve long-pending structural changes? RBI should resist cuts in policy interest rates

** As the Coronavirus (COVID-19) rampages its way across the world, the US Federal Reserve, along with several other major Central Banks such as the European Central Bank (ECB) and the Bank of England (BoE), have cut interest rates to an all-time low, complementing it further with quantitative easing (QE). The President of the US has declared national emergency and Italy - the world's 8th largest economy - has expanded its quarantine to the entire country.

** Accordingly, global financial markets are in turmoil and crude oil prices have crashed, raising the debate on whether the RBI should cut rates. In a press conference on 16th Mar'20, the RBI Governor, Mr. Shaktikanta Das, announced another USD/INR swap and additional LTROs worth INR1t. However, in line with our hopes, the RBI did not succumb to pressure and resisted rate cuts. We believe that the monetary policy is highly inappropriate to address the supply-side disruptions caused by COVID-19; instead, targeted short-term/temporary macro-prudential measures for affected sectors/industries will certainly be more effective.

** Additionally, we argue that COVID-19 presents an opportunity to implement some long-pending structural changes in the country, which would go a long way in improving our economic strength. In this note, we discuss (a) How historically an epidemic/pandemic helped bring about structural economic changes, and (b) What sort of structural changes could be adopted in the Indian economy today?

** Overall, the adverse economic effects of COVID-19 are unavoidable. Moreover, the regulators must also ensure that whatever support is provided - to mitigate the impact - is not only temporary but also highly short-term in nature. Interest rate cuts, therefore, must be resisted and any fiscal response should be extremely targeted and quickly reversible.