RBI's surprise rate cut and US Jobless claims

The Reserve Bank of India, in a surprise move, decided to cut the policy rate by 40 bps in an off cycle policy review. The policy lending rate is now at 4% against the prior 4.4%. The reverse repo rate stands at 3.35% from 3.75% earlier. Five out of six policy members were in the favour of the cut. The policy meeting was otherwise scheduled for first week of June.

 The RBI sees that India is currently seeing a collapse of demand. Major impact is seen on the private consumption and this cut is part of the proactive approach to tackle the crisis. As per the MPC the growth outlook remains dim and the inflation outlook remains uncertain. The Indian rupee is trading around the 75.70 mark after touching a high of 75.85 in the morning trade. The old 10 year bench mark bond trades at 5.94 against the previous close of 6.03.

 In other news, Hong Kong’s Hangseng is down by 4.5% in trading today and the trigger has nothing to do with the corona virus induced economic contraction. The move is more on the back of new laws regarding HK which are being introduced in the annual meeting of the National People’s congress of China. Other stock markets across Asia are also under pressure. Markets believe that this can be a new flash point in Sino US relations.

 The US Stock markets ended slightly in the negative on Thursday. In the US Jobless claims report released yesterday, 2.8 million people filed for claims bringing the total figure of claims since lockdown to 38.6 million. Now contrast this number to the total estimated US workforce which is around 160 million, so around 25% of the total workforce is jobless. Also comparing this to the total number of claims filed during the entire Great Depression, which was close to 8.7 million, will provide us with  a historical context.

 Now let’s see how the benefits stack up for someone who is filing the claim and the economics behind the same. Before the pandemic the average pay-out for a jobless claim was close to 380 $ per week. The actual number for a claimant is depended on what the previous wage was. Under the relief and stimulus program it was decided to add 600$ more to the 380$ pay out making it a close to 1000$ weekly income. The period through which it will be available was also increased.

 In economics nothing is very straight forward and any action results in some unintended consequence. The increased benefit number meant that many people started getting relief which was more than their earning prior to the pandemic. The support saves them from distress but also creates a distorted incentive structure. The US senate is currently debating whether the assistance program tenor needs to be extended, the main point of worry is that increased benefits should not end up disincentivising workers from returning to work whenever the economy reopens.