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The latest policy statement makes many departures and signals a paradigm shift in the thought process at the RBI.
In the epic Ramayana, there is one important instance where the Lord Hanuman needs to visit Lanka to find out whereabouts of Mother Sita, the consort of his master Lord Rama. For the mission, he needs to cross the Indian Ocean. He is feeling depressed as the time is running out fast and he is unable to find a way to cross over the Ocean. At this moment, his friend Jambvana, the King of Bears, reminds Lord Hanuman about his inherent powers. Jambvana tells him that he has enough power to cross the ocean in one single jump. Inspired by Jambvana’s advice, Lord Hanuman recalls his powers and jumps over the ocean.
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The latest policy statement of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) indicates that the central bank may have also recalled its powers and is ready to jump over the logjam in the credit market.
After experimenting, mostly unsuccessfully, with the monetarist academics with heavy western influence for many springs, the RBI finally reverted to its old and tested methods. The latest policy statement makes many departures and signals a paradigm shift in the thought process at the RBI. There is a clear hint in the latest policy statement that pragmatism may finally be making inroads at the RBI. The practice of using limited tools of monetary policy seems to have been abandoned for comprehensive credit policy.
For once, the decision-makers appear inspired to experiment with the entire spectrum of policy tools available to them, rather than just sticking with the limited application of traditional monetary tools. At the risk of invoking criticism from many quarters, I would like to say that the Raghuram Rajan era of monetary experiments at the RBI has ended, and the Bimal Jalan era of comprehensive credit and monetary management to support has been invoked again. The consequences would be known only after 2-3 quarters, but nonetheless I have no inhibition in saying that this change is welcome.
After dithering for too long, the MPC has included the term "as long as it is necessary" in regard to its accommodative monetary policy stance. This shall comfort the markets as it lends a fair degree of predictability to the policy stance. The governor categorically stated in the post-policy press interaction that the next policy move will be a cut, the timing of which will be determined by the inflation trajectory.
New mechanism in place
Instead of cutting repo rate, the RBI instituted a mechanism whereby the short and mid-term bond yields may converge to repo rate of 5.15 percent, effectively meaning more than 50 bps rate cut at the shorter end of maturities. To achieve this end, the RBI has announced Long Term Repo Operations (LTROs) of one year and three year at the repo rate of up to Rs one trillion, which effectively means that Rs one trillion would be available to banks for one year and three years at 5.15 percent instead of 5.8-6.12 percent at present.
Henceforth, a 14-day term repo/reverse repo operation at a variable rate conducted to coincide with the cash reserve ratio (CRR) maintenance cycle would be the main liquidity management tool for managing frictional liquidity requirements.
The RBI provided targeted credit stimulus without actually compromising on overall prudential norms. Traditionally the sector-specific easing was done by relaxing risk weights. This time it has been decided that the banks will be exempted from maintaining CRR on the incremental credit provided by the banks during February-July 2020 period to retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs).
For the benefit of the eligible MSME entities which could not be restructured under the provisions of the circular dated January 1, 2019 as also the MSME entities which have become stressed thereafter, it has been decided to extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020. The restructuring under the scheme has to be implemented latest by December 31, 2020.
Relief for real estate sector
For the benefit of real estate projects that get stuck due to reasons beyond the control of the developer (e.g., due to delay in clearances, courts injunctions, etc.) the RBI has decided to allow extension of date of commencement of commercial operations of project loans for commercial real estate. Loan for commercial real estate here means a loan for real estate being developed for selling and not self-use. This essentially means that the projects remaining uncompleted for reasons beyond the control of the developers shall remain standard asset till the time they are completed. This is one of the most pragmatic policy measures taken in recent years.
Overall the impact of the paradigm shift will be significant in terms of restoring the confidence in the credit market and lending the markets a sense of predictability and comfort. Both lenders and borrowers would be comforted.
It may be too early to conclude that whether the "Das Put" has already been put in place and rally in bond markets, followed by a rally in stock markets is on the anvil. But if I have to bet on this outcome, I would not be too reluctant.
Vijay Kumar Gaba explores the treasure you know as India, and shares his experiences and observations about social, economic and cultural events and conditions. He contributes his pennies to the society as Director, Equal India Foundation. The views are personal.
Read his columns here.
First Published: Feb 7, 2020 12:56 PM IST