Whether it is the decision at the rate front or the development and regulatory policies announced yesterday, the RBI did a balancing act while walking on a tight rope. The Government and the regulator have been quite proactive in handling the economic impact of Covid-19. The Government’s 5-phased fiscal package and the regulators move to provide liquidity to the market and EMI breather to the borrowers was a responsible and timely move.
RBI has not just gone for a status quo but have shown their responsiveness to the twin objectives of Growth and Price Stability. The regulator has been cognizant to the fact that rates cuts without signs of Covid resolution may not further result in effective transmission of rates, which they have so far been able to achieve with the reduction of interest rates by a huge 250 bps since February 2019.
The regulator has placed on records that the transmission to bank lending rates has improved this time, with the weighted average lending rate (WALR) on fresh rupee loans declining by 91 bps during March-June 2020. While the weighted average lending rates of the banks has been reduced, the market borrowings rate has reduced further quite in line with the repo rate reduction indicating a better transmission for the rates.
The RBI is one of the vibrant and dynamic central banks across the globe. The MPC, while taking its decision would have certainly weighed in the decision of other major central banks. Covid induced crisis is something spread across all parts of the world and the responses being made by all Governments and Regulators are almost on similar lines. While fiscal stimulus is being followed by all depending upon their fiscal capacity, the regulators are ensuring that adequate liquidity is provided to the Government and the financial institutions to support the economy and the industry.
The ECB (European Central Bank) was the first to make a status quo in the rates on 16th Jul’20 and decided to keep its refinance rate at 0%. The Federal Open Market Committee (FOMC), which decides over the US Fed rate also concluded its meeting on 29th Jul’20 and did not surprise market by its decision. The Fed Chairman, while announcing the status quo and keeping the rates near zero, did mention his concerns on the growth, jobs and liquidity. While indicating that the rates will continue to remain low, the Fed reaffirmed its liquidity initiatives. Fed is at present buying bonds worth $80 billion per month and has committed to maintain its bond purchases. The MPC of Bank of England has also unanimously voted to maintain Bank Rate at 0.1% and in its meeting dated 4th August’20 said that the outlook for the UK and global economies “remains unusually uncertain”.
On domestic front, the RBI has given adequate attention to the high frequency indicators, which were seen to be improving in June but the July lockdown again pushed back the growth. The industrial production (IIP) moderated to (-) 34.7 per cent in May from (-) 57.6 per cent a month ago, with the easing of lockdowns in different parts of the country. The agriculture prospects seem to be good with the total area sown under kharif crops on July 31 being 5.9 per cent higher than the normal area measured by the average over the period 2014-15 to 2018-19. As on July 30, 2020, the live storage in major reservoirs was 41 per cent of the full reservoir level (FRL), which is good for the rabi season. The decline in passenger vehicle sales also has moderated to (-) 49.6 per cent in June from (-) 85.3 per cent in May, indicative of tentative urban demand, and faster recovery of sales in rural areas.
On inflation, the RBI quite adroitly is taking small steps, and the latest status quo on rates is an example to it. The Governor has been quite categorical in saying that CPI inflation, which was at 5.8 per cent in March 2020, was placed at 6.1 per cent in the provisional estimates for June 2020 and that the inflation pressures were evident across all sub-groups. If the fine prints of his statement are to be read then we would see that inflation would be closely watched for durable reduction, if any, and any decision on policy rates would be taken accordingly.
The steps taken by RBI in the past for keeping the market comfortable on liquidity front are working well and the liquidity is quite comfortable. Keeping in mind the relatively muted credit growth, there was no major demand for liquidity infusion and, therefore, the RBI did not come out with any major liquidity booster in this policy barring a Rs 10000 crore special liquidity facility for NHB and NABARD. As an outcome of ample liquidity in the system, the transmission has been good and as a result the rates on CPs of NBFCs have softened to 3.80 per cent on July 31, 2020. For the non-NBFC borrowers, the rates were further soft at 3.40 per cent on July 31, 2020.
While there were no expectations on the liquidity front, the policy was being looked upon for some relaxation on the restructuring front by the banks. The RBI did not disappoint the bankers as well as the borrower segment, however, the RBI has kept the concept of credit discipline in mind and have incorporated necessary safeguards to ensure that the soundness of the banking sector is not be compromised. The resolution framework for Covid related stress and extension of restructuring framework for MSME debt for accounts classified as standard as on March 1, 2020 is a welcome move.
Overall, the RBI has done a very fine balancing act hearing the concerns of the lenders and addressing the concerns of the borrowers. When RBI arrives at the next policy announcement, there would be more clarity on inflation and other high frequency indicators and should help the MPC in taking more informed decisions.
