Covid-19 and RBI Response
Albert Einstein said, “In the midst of every crisis lies a great opportunity.” So, what are the opportunities during this time of Covid-19?
Yesterday, Finance Minister Nirmala Sitharaman announced food for people in the lower economic strata. Today, the Reserve Bank of India cut Repo rate to 4.4 per cent (this is the money the RBI lends to bank) and Reverse Repo rate to 4.0 (for the money that banks deposit in the RBI). Cutting Repo by 0.75 per cent and Reverse Repo by 0.9 per cent will inject liquidity in the system, which is slowly drying up.
Besides that, cash reserve ratio also been cut.( The objective of the CRR is to ensure that banks maintain a minimum level of liquidity against their liabilities so that they don’t run short of liquidity in case of excess demand for funds.) Reducing CRR to 3 per cent will provide the system with a liquidity of Rs 1.3 lakh crore.
Already India has an advantage on account of the sharp fall in crude price and if it swings in the range of 35 USD a barrel, India will save at least Rs 4.2 lakh crore this year. If the lockdown gets extended further, it might help in reducing oil consumption and extend this advantage. Still, it is positive.
With RBI injecting the liquidity and the savings in oil, India will be able to meet the shortfall on account of the economic slowdown and the money that will be spent in fighting Covid-19.
Apart from that, the RBI has dollar reserves of 480 billion, with lower import and current account deficit (CAD). The dollar has appreciated against the Indian Rupee, leaving RBI richer by Rs 1.44 lakh crore.
In net, when the Covid-19 is tackled, the equity market will bounce back. Along with the RBI action on the short term paper, mutual funds, such as ultra-short term, short-term funds, medium-term funds have potential to deliver better returns than the plain vanilla fixed deposits due to anticipated interest cut by banks.
The risk of longer lockdown will be negative for equity, but it is positive for the debt investments. So, investors with the right asset allocation based on their risk profile will have opportunities to earn better return going forward, although with market volatility.
If you plan to get into equity funds, take the SIP or STP route to invest.
Patience is not passive. On the contrary, it is concentrated strength. –Bruce Lee.