Saugata Bhattacharya, chief economist at Axis Bank, believes that to tackle the Covid-19 crisis, the Reserve Bank of India (RBI) can use the playbook of global central banks and innovate and provide other measures customised to Indian conditions. Calling the RBI’s measures comprehensive and almost unprecedented, Bhattacharya tells Fortune India why it was important to cut the repo rate and the cash reserve ratio (CRR), and shares his thoughts about the way forward. Edited excerpts:
Do you believe that the RBI has done enough to solve the immediate problems arising from the outbreak of the Coronavirus pandemic?
The RBI’s measures at the emergency meeting of the MPC [monetary policy committee] were very comprehensive, almost unprecedented, and went beyond what stakeholders (banks, non-banking finance companies or NBFCs, corporates and the government) had recommended and asked for. Even more strongly, the governor gave a rare forward guidance on the RBI being ready to do what was necessary to counter the economic slowdown arising out of the pandemic.
The suite of measures including the deep, very rare, 75 bps [basis points] repo rate cut, the 100 bps CRR [cash reserve ratio] cut, the additional targeted LTROs [long term repo operation], the prudential relaxations and regulatory forbearance will help banks, and their borrowers with managing cash flow mismatches and accounting stresses to tide over the immediate distress.
Will these measures be enough, or will there be a need for further rate cuts if the situation persists beyond May or June? How low can the repo rate go for a developing nation like India?
The situation is a fluid one, evolving every day, with a lot of uncertainty. The response must adjust to the economic and financial conditions. The RBI governor has indicated that the entire suite of conventional and unconventional instruments it has at its disposal can be deployed if the situation warrants. With core inflation almost certainly likely to remain low with weak demand and falling global commodity and crude prices, the risk of rising inflation in food prices—driven by supply shortages—can be absorbed into headline inflation, leaving room for further cuts in the repo rate.
Do you believe the RBI will have enough firepower left if the crisis was to persist beyond July or August?
As with all global central banks, as the policy interest rate begins to go down to the effective lower band, the suite of unconventional measures will begin to be deployed to keep interest rates low across the entire yield curve. It can use the playbooks of other global central banks and innovate other measures customised to the structure of Indian banking and financial markets. The RBI has already begun to use some of these tools, for instance, the targeted LTROs, to infuse liquidity. Moreover, the RBI has also been coordinating with other financial sector regulators (SEBI, IRDAI, etc.) and using the Financial Stability and Development Council to harmonise responses across various financial intermediaries like NBFCs, mutual funds, insurance, and PF [provident fund] companies.
What measures will the central bank have to take once normalcy returns?
Given the economic weakness likely to persist in the system and consumer and corporate cash flows, the stimulus measures will need to persist for a fairly long time after exiting the lockdown.
The trajectory of recovery and growth revival is unknown at this point and the exit from the ultra-loose monetary policy will need to be calibrated on the basis of the recovery, both domestic and global. The state of the fiscal policy, financial markets, credit offtake and consumer demand will be some key inputs into the process.
Some economists believe that there was no need to cut the repo rate to 4.4% given the lack of demand for goods or services in the system and the delay in transmission of reduced rates. Do you agree?
There was a vital need to cut the policy repo rate. The rate is more than an input into lending rates, although even that is becoming a binding functioning with an increasing share of banks’ loan portfolios being repo-benchmark linked, leading to a concomitant drop in lending rates, particularly for MSMEs. It is also a signal for business confidence, as well as the anchor for the entire yield curve to reprice downwards.
In terms of transmission, the high levels of surplus banking sector liquidity have helped to induce transmission. More importantly, there is significant demand for working capital loans from many businesses, particularly MSMEs, given rising inventories and delayed payments, and this will be of particular benefit to them.
Others point to the fact that given the banks already have enough liquidity of nearly ₹3 lakh crore, why was there a need to provide additional liquidity by cutting CRR by 100 bps?
Banks are facing the prospect of significant losses from the impending asset liability mismatches from payment of interest on deposits while only being able to book accruals of interest from many loans, whose instalments have been permitted regulatory deferrals. The potential to earn interest on CRR, which otherwise earns 0% interest, is likely to offset part of these losses. In addition, together with the relaxation on the need to maintain a lower daily average CRR balance with RBI, the cut will help to manage liquidity better and avoid any potential default due to uncertain cash flows.
Do you believe that the time is ripe for the RBI to start buying corporate bonds from India Inc. to help the corporate bond market?
Although the RBI’s statutory mandate does not permit buying of any non-government bonds and CPs [commercial paper] at present, in an extreme environment—as is currently the case with the U.S. Federal Reserve buying commercial paper—the RBI statutes might be amended by the government to permit it to buy selected types of private sector debt.