The credit relief and liquidity injection schemes presented on Wednesday by the Reserve Bank of India RBI raise the question: What is next to reduce the pandemic impact on Asia’s third-largest economy?
In the middle of sticky inflation, the Benchmark rates remain unchanged for a year so that RBI has relied on a number of unorthodox policies. It has included a ‘Operation Twist’ type of Federal Reserve and a facility known as the Targeted Longer-Term Refinancing Operations, as well as its own version of quantitative facilitation.
Here is a look at what Governor Shaktikanta Das can do otherwise as a result of the pandemic:
RBI CAPS 2.0
RBI’s version of quantitative easing is the State Securities Acquisition Program (GSAP) — when central banks acquire financial assets, mainly government bonds, to pump cash into the banking system. When Das last month introduced its programme of 1 trillion rupees ($13.5 billion), he suggested that there could be more in store.
“We announced the quantum for this quarter and for the second quarter there should also be an element of surprise,” Das said last month. “It’s not one-off advertising.”
Despite stubborn inflationary expectations and doubts about the government’s ability to stick to its debt plan, the programme has helped RBI to lower bond rates and has managed to keep total borrowing costs under control.
More turns
As part of its borrowing costs control efforts, RBI used its own version of Operation Twist – the short-term purchase of bonds to keep the yield curve down.
In view of its impact on borrowing costs in the wider economy, Das repeatedly urged traders to treat the bond rate curve as a “public good.”
“The RBI is now working with system liquidity to increasingly channel its liquidity activities to promote stimuli for growth, in particular at the grass-roots level,” he said Wednesday.
Moratoriums on loans
As the banking sector regulator, the RBI can ease loan repayment rules particularly in areas severely affected by the second pandemic, such as tourism, hospitality, aviation, and the small-scale industry.
Kavita Chacko, a Care Ratings Ltd. economist, said Wednesday’s announcements would include a moratorium on the loan.
“That’s something you can look at later on,” she said. “Some of the sectors most affected, even small businesses, can then come up with measures to alleviate distress.”
Stay comfortable
Although its policy rate has remained the same since mid-2020, the Monetary Policy Committee of RBI will probably remain unchanged until a recovery rate setter is sure to start. Deputy Governor Michael Patra said inflationary pressures could be neglected due to weak demand, while his central bank counterpart Mridul Saggar believes that supporting growth now stands as a priority.
This would allow policymakers to keep rates lower even if they do not further decrease.
“Rate cuts are currently improbable unless the growth outlook significantly deteriorates,” said Rahul Bajoria, Barclays Bank Plc Senior Economist at Mumbai. “As long as the Monetary Policy Committee maintains a predicament, it is likely that it will rely on nonconventional policies.”
