The status quo on key policy rates in June was as expected. Friday’s Monetary Policy Committee (MPC) meeting took place against a complicated backdrop of fresh upside pressures for inflation, despite renewed headwinds for growth recovery and markedly weak domestic demand. While threats of CPI inflation prints crossing the Reserve Bank of India’s (RBI) “upper tolerance band” in the coming months appear real, one feels that it was apt for the MPC to convey their bias to look through the same and to continue supporting economic activities, given the nascent and tentative nature of recovery.
A consistent policy bias to support growth recovery
This remains consistent with the agility that the RBI demonstrated in using both conventional and unconventional monetary policy tools during the past about 15 months to buffer the economy from the effects of the pandemic. Indeed, the harsh second wave of the pandemic, apart from the ongoing lockdowns and immediate loss of economic activities, will likely impact medium-term business and consumer confidence. Urban consumer confidence, that reached a multi-year low during the first wave of COVID-19 infections in Q2 2020-21, barely improved during the remaining months of the financial year. The soon-to-be-published RBI survey will be an important source of information on whether consumer sentiment faces a fresh blow amid the second wave.
Overall, while the RBI has lowered their 2021-22 growth forecasts today by a percentage point to 9.5 percent, one feels further 1-2 percentage points downside to the same remains possible. On the other hand, one sees upside risks to inflation prints compared with the central bank’s forecast of 5.1 percent during 2021-22. However, we do not expect that to alter the MPC’s bias for growth-supportive policies in the coming months.
Support for small businesses, stressed entities
In Friday’s policy, the RBI further emphasised the need for “thinking out of the box” and using unconventional monetary policy tools to support the economy as it offered a slew of measures to increase the flow of liquidity to small businesses and MSMEs. These small businesses, especially those that are in contact-intensive sectors (eg., hospitality, tourism), have been at the receiving end of lockdowns and restrictions on movement implemented by different states. The liquidity tap of Rs 15,000 crore introduced with tenors up to three years at the repo rate till March 2022, if utilised effectively, can help these entities to stay afloat.
The banks have also been allowed to park surplus liquidity with the RBI up to the level of the separate Covid loan book created on account of lending to such borrowers at a 40 basis point premium to the reverse repo rate—thereby, incentivising “Covid loans”. While the success of such an initiative will be known only over time, a more broad-spectrum initiative that is likely to help MSMEs across the board is the special liquidity facility of Rs 16,000 crore for SIDBI. This facility can be extended for on-lending/refinancing debt extended to MSMEs and will help them with their short-to-medium term capital needs. Such measures appear designed to handhold India’s small businesses, especially for the next few quarters by when the intensity of the second wave is expected to reduce.
In addition to helping small businesses with better channeling of fresh liquidity, the RBI also appears cognizant of the need to extend the framework for the resolution of stressed assets to a wider basket of companies that may be facing stress. Consequently, the threshold for aggregate exposure of borrowers who would qualify under Resolution Framework 2.0 has been hiked to Rs 50 crore. This measure would cover a lot more companies that may be temporarily unable to service their debt.
Larger quantum of GSAP, including SDLs
Ensuring stability in the financial system and in financial markets had been key priorities for the RBI throughout the pandemic. Despite the widening fiscal deficit and larger borrowing, steps such as the G-SAP helped cushion the overall interest rate spectrum. Further step-up in G-SAP and inclusion of SDLs in the same are encouraging and should continue to offer support for the broader spectrum of the yield curve.
To sum up, while the macroeconomic backdrop got complicated again in recent months, strong contra-cyclical policy resolve was appropriately re-emphasised in the June MPC meeting. It was heartening to find fresh policy initiatives towards better credit flow, including to MSMEs, smaller businesses and stressed sectors. As a discernible recovery in the economy is still some time away, the central bank will likely continue with its supportive monetary policy in the coming months, likely relying more on unconventional tools.
—Siddhartha Sanyal is Chief Economist & Head of Research in Bandhan Bank. The views expressed are personal
(Edited by : Ajay Vaishnav)