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Chief economist update: Premature easing will cost more lives, more rupiahs

It was one of the first movers in the fight against containing the spread of infection from the coronavirus pandemic.

On March 24, Indian Prime Minister Narendra Modi ordered one of the strictest lockdowns of any country in the world, warning that: "If we don't manage these 21 days, the country will be set back by 21 years."

The total number of infection cases in the country was only 500 at the time.

The government announced an economic stimulus package - worth around 1.7 trillion rupees ($22.5 billion) two days later to support families and workers affected by the virtual of nearly all social and business activities.  The government topped this up with Rupiah 20 lakh crore (trillion) -- USD 260 billion - equivalent to 10% of Indian GDP, on May 12.

The Reserve Bank of India (RBI) also went to work, cutting its benchmark repo rate and the reverse repo rate by 75 bps each to 4.4% and 4.15%, respectively, while at the same time reducing the reserve ratio by 100 bps to 3.0% to boost liquidity on March 27.

This was followed by more stimulus measures: on April 1, the RBI announced it would defer the implementation of counter-cyclical capital buffer, review of limits of Way and Means advances of States/UTs and an extension of realisation period of export proceeds; on the 27th of the same month, the RBI launched a special liquidity facility for mutual funds (SLF-MF) of 500 billion rupees (USD 6.56 billion) to ease pressure due to the coronavirus pandemic; and, on May 22, it unexpectedly cut the repo and reverse repo rate by 40 bps - to 4.0% and 3.35%, respectively.

India's stringent lockdown measures has taken its toll on the already slowing economy - GDP growth slowed from 5.7% in March 2019 to 4.1% in December - before the pandemic to 3.1% in the year to the March quarter of 2020.

Worse, the IHS/Markit India composite PMI remained at an extremely low 14.8 in May after dropping to a single-digit reading of 7.2 in April - suggesting that the worse is yet to come.

The premature easing of lockdown restrictions in late May and the consequent increase in the rate of infections in the country - India now has the fourth highest case in the world and the highest among Asian countries - could force another lockdown, compelling both the Modi government and the RBI to implement greater stimulus measures.

Read our full COVID-19 news coverage and analysis here.

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