In keeping with the promise of the RBI Governor that the RBI will do whatever it takes, it is reasonable to expect a sharp reduction in the borrowing costs. We expect the RBI to continue with its liquidity infusing tools such as open market operations (OMOs), forex swaps and long-term refinance options (LTROs), but also to announce measures to support corporates suffering from business losses due to the pandemic outbreak.
As the ongoing slowdown will drastically impact the financial health of many sectors, we expect the RBI to introduce forbearance measures towards the most affected or stressed sectors, and extend the repayment schedule and moratorium, along with implementing other measures, to avoid large NPAs and reduce risk weights. We expect the RBI to continue with accommodative monetary policy actions and stance; and cut the repo rate by 50 basis points.
We believe the RBI is running the risk of falling behind in terms of proactive policy intervention, especially with the magnitude of shocks currently hitting the Indian economy and the financial system. So far, the measures have been on increasing domestic and dollar liquidity to ease financial conditions.
At the least, we expect the RBI to deliver a 50bp repo rate cut and a minimum, 65bp of policy easing in Q2, bringing the repo rate to 4.50%. In addition, we expect the RBI to significantly ramp up its market intervention via open market operations (OMO) purchases and unconventional tools like Long Term Repo Operations (LTRO).
Such emergency situations may also encourage it to expand the scope of its asset purchase programme to consider corporate bonds and other non-gilt securities, either taking on credit risk directly to its balance sheet, or structure a special purpose vehicle in conjunction with the government.
It may also choose to deploy tools like adjusting risk weights of banks towards various sectors, or lowering counter-cyclical capital buffers. Easing NPA norms for MSMEs or extended loan repayment windows for them and households may also be considered as a cushion against a potentially massive pile-up of bad debt.
As growth and inflation are revised downwards globally, room for policy easing opens up for India as well. The disinflationary forces should provide the MPC comfort that inflation should move below RBI's 4% target in the coming months. Our economist expects a 25-40 bps cut, with risks skewed towards the upper end of the range.
While fiscal headroom opens up given the sharp drop in crude prices, the Government is likely to allow some pass-through to consumers given the current bleak scenario due to COVID-19. Also, expenditure pressures will rise to bolster healthcare systems to cope with the outbreak and execute targeted intervention to cushion the subsequent economic shock. Budgeted tax revenue targets are also under pressure given a COVID-induced growth hit.
The Government announced an economic support package to tide over the nationwide lockdown situation. It appears small, especially as some of it (about one-third) appears to be a reuse of existing fund allocation. Also, some part includes an additional contribution to the long-term retirement funds. No formal announcement but the FM dropped hints that more might be likely going forward. But, if not, the current package is underwhelming.