The balance of probability is that the Monetary Policy Committee
(MPC) will pause in policy repo rate cuts (after a series of cuts from 6.5 per cent in early February 2019 to 4 per cent). Yet, a further but shallow cut is not ruled out. The outcome will depend on MPC’s reading of multiple input decisions — but dominantly the trade-off between growth contraction and (for an inflation targeting MPC, the optics of) the persisting higher than mandated inflation, despite largely created by supply disruptions.
Reserve Bank of India’s surveys of various economic indicators will be key inputs — specifically household inflation expectations — into the actual rate decision. The rate actions will be accompanied by strong forward guidance to signal continuing accommodation using all policy instruments, including high surplus system liquidity in the near future.
The concern is not just of a real growth contraction (we still forecast a minus 6 per cent FY21 GDP growth but with significant risk of slippage into double digits), but of a large loss in nominal income and hence consumption demand, with significant consumer behavioural changes. As a consequence, reduction of existing debt by households and corporates indicates a slow prolonged recovery, the so-called “balance sheet effect”.
The stimulus response of government and RBI — the deep rate cuts and unprecedented use of unconventional channels of liquidity infusion — have hitherto been largely concentrated on the first leg of an apparent “survive, revive and thrive” strategy to counter the demand destruction and stabilise a deeply stressed ecosystem, of MSMEs, migrants, small exporters, distributors, and dealers and other vulnerable segments whose cash flows would quickly have turned from a liquidity to a solvency crisis. To a large extent, this has been fairly effective.
The focus of the stimulus measures will therefore now likely turn to the “revive” phase. Obviously, given the constraints on the ability to mount a strong fiscal response via direct spends, the strategy — correctly in our opinion
— has been to use credit flows to first, augment cash flows, and then progressively infuse growth capital. The best articulation of this road map and resulting trade-offs was the recent address by RBI governor. The RBI will be walking a very fine line in balancing the need to incentivise the adoption of a calibrated risk exposure with concerns of relaxing credit appraisal discipline and a future rise of NPAs and financial instability.
While banks have been proactive in disbursing over Rs 80,000 crore (Rs 800 billion) of credit to MSMEs under the ECLG Scheme, overall flows of bank credit (and indeed funds flows from other intermediaries like NBFCs and Mutual Funds) have remained muted, partially the result of weak credit demand.
In the near term, a judicious extension of the set of measures to help small enterprises to cope with a disruption of cash flows might be required. Further moratoriums are probably not desirable, given the formal re-opening of business. Transitional, selective, and prudential relaxations in bank regulation to manage the transition might be a via media. Ultimately, recourse to growth capital for banks and other financial intermediaries will be the crucial for financing growth.
The writer is executive vice president, business and economic research, Axis Bank. Views are personal