MUMBAI: India’s central bank knows that the economy is on a ventilator and precious little can be done until the lockdown is lifted. Even so, spirits have to be kept high for the immune system to work and that is probably the thinking behind today’s off-cycle rate cut by the Reserve Bank of India (RBI).
As rate cuts go, this one was met with a shrug from markets. Bond yields slumped 15 basis points but recouped to end 7 bps lower as worries over the looming borrowing caught up with the market. Equity indices remained in the red, with stocks of banks and financial services firms hit the most.
Economists believe that the 40 basis points policy rate cut was more about signal rather than actual outcomes. As such, short-term rates have already crashed below the policy rate due to surplus liquidity.
“It (rate cut) should ease the cost of credit further. However, in the absence of demand for credit and extreme risk aversion among banks, we remain doubtful about its effectiveness in stimulating growth,” said Anagha Deodhar, economist at ICICI Securities.
An emergency meeting of its six-member monetary policy committee (MPC) 13 days before schedule showed that the central bank will not waste time to react.
“This is more about saying that we are alert and aware of the situation rather than actual impact. The approach of both the monetary and fiscal authorities seems to be to ensure survival,” said an economist at a foreign bank requesting anonymity.
Sure, the life of the borrower has been made easy. Interest on working capital can now be deferred till 31 August. This interest portion can be converted into a term loan and repaid by March 2021. In short, the borrower has some time to repay.
Meanwhile, the moratorium on loan repayments has been further extended to 31 August, a key ask by lenders.
But these measures are to ensure survival of businesses, especially small and medium enterprises that are struggling to stay afloat. It is also to ensure that lenders don’t get hurt due to rising defaults. Whether defaults will rise once the moratorium is over is another story for another day. For now, the red flags on bad loans are best not raised.
But while survival is key, recovery is as crucial.
The demand destruction for businesses has been immense due to the lockdown, with quarantined consumers unable to consume beyond essentials. As economic activity resumes slowly in various parts of the country, reviving demand should be next on the agenda.
State Bank of India chairman Rajnish Kumar believes the measures would help revive the economy. But Kumar offered little clarity on how would this come about. Nearly 20% of SBI customers have availed of moratorium and more may do so, now that it is extended.
To be fair, the central bank too has little clarity on the pace of recovery. What it knows is that the economy would shrink in the current year. Considering the trend in inflation is expected to be downwards, the RBI can do more to revive growth.
Further rate cuts are not ruled out and what stands out is this statement from Governor Shaktikanta Das: “The RBI will continue to remain vigilant and in battle readiness to use all its instruments and even fashion new ones, as the recent experience has demonstrated, to address the dynamics of the unknown future.”
For now, markets are unwilling to look beyond the trials towards triumph.