A non-monetary policy, par for the course

In May, when the Reserve Bank of India (RBI) went for an out-of-turn policy rate cut for the second time in a row, paring its policy repo rate to a historic low of 4 per cent, the equity market gave it a thumbs-down and bond prices rose marginally. On Thursday, the RBI refrained from a rate cut but the equity market cheered the policy; the bond prices dropped but there was no big selloff.

The reason behind the Monetary Policy Committee’s (MPC) consensus decision is the rise in inflation. For the same reason, the RBI governor’s statement doesn’t have any explicit foreword guidance on the next rate cut but none can complain. There is a structural shift in the central bank’s monetary policy — the focus is now on non-monetary measures.

The RBI is committed to “do whatever is necessary to revive the economy and preserve financial stability” but the next rate cut is off the table, for now. The retail inflation in June was 6.09 per cent, higher than the upper band of the RBI’s target. The MPC expects it to remain elevated till September before it starts easing in the second half of financial year 2021, aided by favourable base effects, but it has not committed to any figure. Ditto on growth, which is estimated to be negative.

The space for further monetary policy action will be created after inflation eases as the MPC doesn’t want to compromise on its medium-term inflation target (4 per cent with a 2 percentage-point band). The RBI’s rate-setting body will wait and watch “for a durable reduction in inflation” for action. For that, we may have to wait till February next year.

The no-rate-cut policy is a non-event for the bond market but for the economy and the banking system, it’s par for the course as the RBI has taken a series of non-monetary measures to support growth and keep the stressed financial sector stable. The most important of them is a Covid-19 window for one-time loan restructuring.

In June 2019, the RBI had framed norms for loan restructuring that made it mandatory for banks to treat restructured stressed loans as sub-standard unless there was a change in ownership of the borrowing company. Now, the banks can restructure loans for Covid-19 affected companies and treat them as a standard asset even if there is no change in ownership. Those stressed loan accounts, which had been in default for not more than 30 days as on 1 March 2020, could be covered under the new scheme.

An expert committee, headed by K V Kamath, who recently retired as chief of the New Development Bank of BRICS nations, will look into the finer aspects of the resolution plan under the scheme that will allow banks to stretch the repayment period by up to two years and convert part of the debt into equity, among others.

Not just corporate loans, banks are being allowed to restructure Covid-19 affected personal loans too under a separate framework. For the stressed loans given to micro, small and medium enterprises, there is already a restructuring platform in place. The RBI has extended it by three months — instead of December 2020, it will end in March 2021.

The announcement of the one-time forbearance package gives a signal that the six-month moratorium given to borrowers that ends in August will not be extended despite the clamour by many of them. While the RBI is extremely careful that the system doesn’t misuse the recast window, like the earlier schemes, the community of bankers should feel happy seeing Kamath heading the expert committee on restructuring and moratorium ending in August.

After the 115 basis points rate cut at two off-cycle meetings in March and May (beside a mid-April cut in the reverse repo rate by 25 basis points) this was the current MPC’s last policy meeting. By October, a new MPC could be in place. For the next rate cut, we will have to wait longer but by that time the government’s big, fat borrowing programme for the second half of the financial year will stare at the central bank. Going forward, we will have more non-monetary measures such as twists, open market operations, reshuffling of banks’ bond portfolio and even direct monetisation to see it through.


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