Monetary, fiscal policy best option to deal with Covid-19 fallout

A combination of monetary as well as fiscal policy could be the best option to deal with the economic fallout of coronavirus, a State Bank of India report said on Tuesday.

It said that on the monetary side, the first best option is maintaining a proactive liquidity regime and facilitating stability in financial markets through unconventional measures.

The SBI Ecowrap report said: "The monetary stance may be eased temporarily through a rate cut by the RBI to accommodate the possible surge in liquidity demand and shock-related price increases.

"An adequate supply of cash notes to banks needs to be ensured that can meet a sudden increase in the demand for liquidity."

However, the report pointed out that deposit and lending rate cuts beyond a point is counterproductive and actually creates perverse flows into liability products that are offering higher interest rates.

"This could always be a recipe for future problems, if assets and liabilities are not properly matched, as the experience of Yes Bank shows. Also, pandemic shock has an embedded adverse supply shock angle as China is the supplier of many critical inputs," the report said.

"Hence only a rate cut in the current situation with no fiscal measures will lead to asset bubble and possibly no correction in demand. Concomitantly, there is a need to revive consumer demand."

In addition, on the fiscal side, the report said that nearly 30 per cent fall in crude oil prices could lower petrol prices by Rs 12 per litre and diesel prices by Rs 10 per litre in India from their present prices.

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"The additional revenue accruing to Centre from increasing the excise duty could be spent on providing relief to people at the lower strata who will lose income because of shutdown of commercial activity in states," it added.