The Reserve Bank of India's approach to monetary policy is not part of any globally coordinated central bank action, economists at Citi said.
India's central bank called for an impromptu press conference on Monday where many expected Governor Shaktikanta Das to announce an emergency rate cut.
That's likely because a day earlier, on Sunday, the U.S. Federal Reserve said it was dropping its benchmark interest rate to zero and launching a massive quantitative easing program to shelter the U.S. economy from the COVID-19 pandemic.
The disease, which started in China's Hubei province, has infected at least 168,000 people worldwide and killed more than 6,600 people, according to data from the World Health Organization.
"It is quite apparent that the RBI's policy decision is not part of any globally coordinated central bank action," Citi economists Samiran Chakraborty and Baqar M Zaidi wrote in a Monday note, following the press conference. "Central bankers are trying to counter two channels of transmission of the shock – financial stability risk arising from large market dislocations and growth risk from (an) estimated disruption in economic activity."
Following the Fed's move, the Bank of Japan announced measures focused on higher asset purchases and a new lending program to boost liquidity in the system, but kept its policy rate of negative 0.1% unchanged. The Bank of Korea slashed its benchmark rate by 50 basis points, from 1.25% to 0.75%, at an emergency meeting.
Other central banks, including those in Australia and England, have also reduced interest rates in recent months to tackle heightened global volatility and the economic fallout from the COVID-19 pandemic.
For his part, Das said policy actions and reactions must be "carefully considered and calibrated" in order to assuage sentiment and instill confidence.
The RBI announced measures on Monday to pump rupee liquidity into India's banking system, as well as supply the foreign exchange market with U.S. dollars. Das added that the RBI has "several instruments at its command and stands ready" to take appropriate measures to mitigate any impact on the Indian economy.
The impact of COVID-19 on India's economy is still relatively mild. But even before the outbreak, quarterly expansion rates were already off previous levels that made it one of the fastest-growing major economies due to other factors.
RBI's monetary policy committee "does not have an explicit mandate to tackle financial stability risks, pushing it to act only when the growth risks are more visible," the Citi economists said, adding that could be why the central bank is "waiting to assess the spread of the virus in India and estimate its growth impact before acting."
They explained the possible reasons behind the RBI's decision to not announce any changes to the repo rate — or the rate at which it lends to commercial banks — this week.
First, the consumer price index is still outside of the monetary policy committee's mandated band. The RBI's medium-term target for CPI inflation is 4%, within a band ranging from 2% to 6%. Second, the central bank is worried about the dollar/rupee impact of a rate cut and finally, "it is concerned about whether an inter-meeting action would signal panic," they said.
Still, Citi expects a 25 basis point cut in the April policy meeting; if the COVID-19 outbreak in India is very acute, then the RBI could make a 50 basis point cut. Chances of the RBI cutting rates outside of its scheduled policy meetings appear low, the Citi economists said.
Other economists have also said they expect a 50 basis point cut by the first half of 2020.
Nascent improvement in demand and manufacturing indicators in India are being threatened by the virus, economists at ANZ Research said.
India's health ministry reported at least 140 confirmed cases on Tuesday morning, including 13 discharged and two deaths, and states are beginning to shut down public places like shopping malls and cinemas.
"With financial stress added in the mix, India faces a scenario of prolonged lower growth," the ANZ economists said, adding COVID-19's adverse impact on growth is set to become evident from March. "Given the heightened risks of a sharp global slowdown, fiscal and monetary accommodation needs to be stepped up."
Last year, the central bank slashed its repo rate by 135 basis points.