The trump card to pull out the economy from the current downward spiral lies with the Reserve Bank of India, says IDBI Mutual Fund's Fixed Income Head Suyash Chaudhry.
According to him, fiscal deficit including that of public sector companies is at 8-8.5 percent and can't be expanded more because of India’s falling household savings. He, therefore, wants the RBI to force down bond yields by buying bonds.
An IDFC report observed that the current downturn with more and more people marking down GDP growth to 5 percent is perhaps more difficult than 2008 downturn because at that time the banks were lending to the commercial sector and fiscal space was also there. However, now the credit to the commercial sector has fallen from calendar 2018 to 2019 by 88 percent because NBFCs are reducing their balance sheet size by 40 percent and banks are also pulling back because they have reached limits.
To weigh in the matter, CNBC-TV18’s Latha Venkatesh spoke with Suyash Chaudhry, economist Dr Pronab Sen and Finance Professor Ananth Narayan. Narayan and Sen noted that more money printing by the RBI can lead to financial instability.
The report also states that there is no fiscal space as the deficit is already high. However, the report argues that monetary space is still there because transmission has not happened. Real interest rate according to it are close to 6 percent. The other thing the RBI should do is buy more bonds at open market operation and not worry about financial instability because inflation will come down.