Reserve Bank of India – the government's debt manager, regulator of financial institutions, and lender of last resort – wears a heavy mantle. It has to walk a tight rope to maintain these balances.
By keeping rates on hold when it could not bring them down any further, promising to not reverse its easy money stance, and reassuring bond markets to ensure low borrowing costs for the government's massive borrowing programme, RBI has done its bit. It went a step ahead and lent a helping hand to the most vulnerable sectors by directing credit to them, and giving banks incentives to lend to them.
Caught between slowing growth and rising inflationary pressures, the MPC decided to pause. It left rates unchanged, and said it would continue with its easy money policy "as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward". This may well be the MPC's default mode this entire year, according to several economists.
All this, despite the MPC revising its inflation forecast upward and growth forecast downward. It now sees India's GDP growing by 9.5 percent in FY22, 100 basis points lower than its April forecast of 10.5 percent.
Although RBI has revised the retail inflation forecast upward by 20-30 basis points across July-March quarters, it also indicated that it would look through this for now.
For bond markets, RBI Governor Shaktikanta Das went all out. Through the accommodative stance, RBI signaled to the markets that it will not roll-back its easy money policy anytime soon.
RBI had committed to buying Rs 1 trillion worth of government securities via G-SAP 1.0 (Government Securities Acquisition Programme) in Q1 of this financial year, and has already bought Rs 60,000 crore worth of GSecs, with a promise to conduct an auction for another Rs 40,000 crore on June 17. It followed this up with the widely anticipated G-SAP 2.0, with a promise to buy an even higher amount of Rs 1.20 trillion in the second quarter.
Put together, the G-SAP 1.0 and 2.0 announcements are as good as an Open Market Operation (OMO) calendar, which the bond marketwallahs have been asking for. Das has given them no reason to complain, really. Given these measures were on expected lines, bond yields had factored them in already and hardly moved in trade on June 4.
Whether RBI can continue to pump in all this liquidity without stoking inflationary pressures in the economy, and at what point will it have to start the process of normalising the policy are not matters that seem to be of immediate concern for the central bank for now. Growth is priority and RBI has made that amply clear with its action and guidance.
As part of its emergency playbook, RBI has undertaken a series of measures since last year. From a sharp 115 cut in repo rates, a massive bond purchase programme, targeted lending to vulnerable sectors, loan repayment relief to small borrowers, to even allowing the much-frowned upon forbearance to lenders -- RBI has done it all. It followed these up with more measures.
RBI expanded the scope of 'Resolution Framework 2.0' which it announced in the last policy, by allowing lenders to restructure loans of MSME, small business owners/individuals with exposure of up to Rs 50 crore, double from Rs 25 crore allowed earlier. This will help banks recast loans of a broader universe of borrowers that may have been affected due to COVID-19.
Secondly, it opened up an on-tap borrowing window of Rs 15,000 crores for contact intensive sectors. Under this scheme, banks can borrow money from RBI at prevailing repo rates of 4 percent with a 3 year tenor, and lend to sectors such as hotels, travel, tourism, salons, spas, aviation and ancillary sectors, bus operators etc. Further, to incentivise banks to lend to them, RBI has allowed them to park surplus liquidity with RBI at 40 basis points higher than the existing reverse repo rate to the extent of the Covid loan book they create with these contact intensive sector loans.
Third, RBI announced yet another special liquidity facility for SIDBI for Rs 16,000 crores in order to meet MSMEs’ short- and medium-term credit needs.
While all these are well-intended measures, they may not necessarily address risk aversion among lenders. For instance, of the Rs 10,000 crores special liquidity facility announced for small finance banks to lend to small borrowers on May 5, only Rs 400 crores was borrowed. This reluctance to lend may be driven by lenders’ worries about a rise in bad loans.
Governor Das went to the extent of assuring stakeholders that the central bank will not stop at this. If a need arises, RBI will step up, announce more measures.
Now it is over to the government.
(Edited by : Jerome Anthony)
First Published: IST