Economy gets new anti-viral shot
NEW DELHI: The RBI is expected to cut quick sticks just like its global peers to contain the Covid-19 economic fallouts, but India’s central bank maintained a Zenlike calm reserving much of its precious ammo for another day.
On Friday though, Governor Shaktikanta Das announced nine measures to ease liquidity, credit flow and financial stress, but received only two cheers in return.
RBI too has adopted a ‘whatever it takes’ approach, but for Das and team that moment of reckoning is still days, or perhaps weeks away.
Which is why, Friday’s measures ranging from a 25 bps reverse repo rate reduction to Rs 50,000 crore Targeted Lending Rate Operations (TLTRO-2.0) with special mention to NBFCs to relaxation of NPA classification norms to lower liquidity coverage requirement to banks, were all written off as small beer.
According to Suyash Choudhary, Head-Fixed Income, IDFC AMC, the RBI is somewhat underestimating the real problem, which in his view is inadequate availability of risk capital.
Hence, some of the push measures may not yield much. Just why? Take banks. Though RBI is offering ultracheap money at just 4.4 per cent interest, banks aren’t playing ball. They are taking the money alright, but are lending it only to those with piles of cash to avoid defaults.
The trouble is, with economic activity grinding to a halt, small and mid-size firms are facing cash-flow issues, and absence of bank credit could potentially turn them insolvent.
This, in turn, will add to unemployment. To prevent the ensuing crisis, Das on Friday mandated banks to deploy 50 per cent of the Rs 50,000 crore rasied via TLTRO 2.0 among NBFCs and MFIs.
Besides liquidity, the market also wants to know RBI’s go-to action plan to manage the oversupply of government bonds.
Elsewhere, central banks are coming to the governments’ rescue even if it means printing more currency.
What we all know is that both central and state governments have to spend not only during the 40-day lockdown period, but also during the postCovid reconstruction phase to revive economic activity.
Clearly, the general government deficit (centre and states) will rise exponentially (even over 10 per
cent). But if states and the Centre borrow more, the increased supply of government bonds in a demand-slump market will spike yields higher.
That’s why, market is seeking clarity on how RBI will absorb these bonds. “To be fair to RBI, it maybe awaiting the actual announcement of borrowing to unveil the absorption plan,” Choudhary added.
Meanwhile, the central bank governor indicated that all options were on the table including buying bonds from the open market when needed.
While he emphasized that macroeconmic landscape deteriorated severely in some cases, India continues to be among a handful of countries with positive growth.
Finally, he presented a benign analysis of inflation noting that prices will likely settle below the mandated 4 per cent by second half, which will leave additional space to reduce policy rates later.