G-7 finance ministers “are ready to take actions, including fiscal measures where appropriate,” the US Treasury said in a joint statement following a conference call that included central bankers such as US Federal Reserve chairman Jerome Powell and Bank of England governor Mark Carney. The call took place on Tuesday morning US time.
RBI governor Shaktikanta Das said RBI was prepared to take action to combat the effects of the disease and reiterated that there’s room to cut interest rates in an interview to Bloomberg. He also said that the impact of the virus on India is via China and global trade.
Indian banks have been asked to draw up contingency plans and send these to the RBI.
“Considering the fast pace at which the virus spreads (in matter of days, not weeks), please make a quick assessment of your readiness and have an action plan, which may be sent to us at the earliest,” the RBI’s Department of Supervision told them in a communication that ET has seen.
These plans should address the possibility of further stress on corporate loans since several Indian companies, especially those that depend heavily on Chinese vendors, are likely to face supply chain stress, two people familiar with the matter said. The corporate sector, which typically does not hedge adequately against currency and commodity price fluctuations, may pose a high risk to bank health, said an Oliver Wyman report that the RBI has sent to lenders.
Markets have broken a run of losses, encouraged by the prospect of central banks acting in conjunction.
“Growing hopes of coordinated policy action to mitigate a broader fallout to economic activity has boosted market sentiment today,” the central bank said in a press release on Tuesday. “The Reserve Bank of India is monitoring global and domestic developments closely and continuously and stands ready to take appropriate actions to ensure orderly functioning of financial markets, maintain market confidence and preserve financial stability.”
Given the banking sector’s fragile financial situation, burdened as it is with bad loans, the worry is that any disruption may amplify the stress.
The RBI didn’t respond to ET’s queries but said in its press release that domestic volatility has been reined in.
“Globally, financial markets have been experiencing considerable volatility, with the spread of the coronavirus triggering risk-off sentiments and flights to safe haven,” RBI said. “Spillovers to financial markets in India have largely been contained.”
In its communication to banks, RBI referred to the report by global management consulting firm Oliver Wyman that stressed on banks revisiting risk management policies in light of the Covid-19 threat.
“We have long believed that the Indian real economy is under-hedged against market risk, with the corporate sector insufficiently hedging itself against movements in rates, currency and commodity prices,” the report said. “This creates a risk for the local banking sector, even where direct balance sheet exposure is limited.”
The rupee ended Tuesday at 73.29/30, weaker than Monday’s close of 72.72 as importers rushed to cover their positions following reports on more people getting infected in India. The rupee had opened stronger at 72.45 but intra-day volatility took the sheen off this.
“Further depreciation in the rupee cannot be ruled out. We expect RBI to intervene to put the brakes on volatility but it may support any targeted level,” said KN Dey, founder of United Financial, a Mumbai-based forex advisory firm.
The Oliver Wyman report said that heightened nonperforming assets (NPAs) are also a likely outcome and banks need to ensure that collection policies are fit for purpose. If the disease spreads in India, retail and microfinance portfolio can be impacted, it said.
The Bank of England’s Carney had said before the G-7 call that policy makers are putting together a “powerful and timely” defence of the world economy against the coronavirus, Bloomberg reported. Australia and Malaysia have cut interest rates and Carney reiterated that the BoE will protect the UK economy if needed. European stocks surged and US equity futures jumped on Tuesday as expectations rose that policy makers will act.
The Bank for International Settlements is arranging a conversation in a week or so of 15-16 key central banks to discuss actions in response to the virus, a person familiar with the matter said.
President Donald Trump maintained his pressure on the Fed to lead the response in the US, pointing to Australia’s rate cut. The Fed “should ease and cut the rate big,” Trump said on Twitter. “Jerome Powell led Federal Reserve has called it wrong from day one. Sad!”
(With inputs from Bloomberg.)