The Monetary Policy announcements last week by the Reserve Bank of India (RBI) Governor Shaktikanta Das were bold in ways that the banking regulator this time decided to target growth instead of focussing too much on inflation control. The CPI inflation continues to remain high (at 7.34 per cent in September) – significantly above the regulator’s comfort level of 6 per cent. However, in its own assessment,the Gross Domestic Product (GDP) contracting by 9.5 per cent during 2020-21 (April-March) is a much bigger animal, that needed to be tamed.
This approach is a welcome one, as the system is lacking liquidity. The lack of consumption was a problem even before the pandemic, which has now risen-up to alarming levels. This monetary policy announcements aims to put more liquidity into the system.
Though the RBI kept policy rates unchanged even when the inflation has been seeing a steady rise, Governor Das has assured that the Central Bank will maintain an accommodative stance, indicating further rate cuts if the inflation came back around its comfort zone. Interest rates have been slashed by 115 bps, this year.
RBI’s mandate is to keep inflation at 4 per cent with a trade-off 2 per cent on either side.
Growth Vs Inflation Control:
The CPI inflation has been high mainly because of the food inflation that has been in double digits. The RBI, in its wisdom believes that this inflation is transient and primarily due to the supply side problems in the wake of lockdown restrictions. We are in the fifth phase of lockdown, with many restrictions now relaxed. As the restrictions are further lifted-up and the economy further opens, the disruptions are likely to go. This could potentially bring down the inflation. At least, the RBI believes, so.
Das in his commentary outlined that the inflation would decline to 4.3 per cent by April-June quarter of 2021.
It is another matter that, Das’ optimism hinges on the Government’s ability to fix the supply-side issues along with the trade policies implemented by latter, over the next 2-3 quarters.
With a note of cautious optimism, Das had said that he expected a strong rebound in the Indian economy from here.
Steps taken by RBI
Since, the beginning of the pandemic, RBI had been taking steps to arrest the fall in the economy. The new set of measures include steps to enhance liquidity in the financial markets; providing regulatory support to improve the flow of credit to specific sectors along with exports.
RBI will be conducting on-tap TLTRO (Targeted Long Tern Refinancing Operations) with tenors of up to three years for a total amount of up to Rs1,00,000 crore at a floating rate linked to the 4 per cent repo rate till 31 March 2021. This is expected to pump in a lot of liquidity in specific sectors that have potential to revive the economy.
The RBI will also be conducting Open Market Operations (OMO’s) worth Rs 20,000 cr to create further liquidity.
Among other measures, the regulator has also enhanced the limit for Ways and Means Advances (WMA) for the centre to Rs1.25 lakh cr compared to Rs 35,000 cr in H2 of the previous year. Likewise, the 60 per cent increase in WMA limit for states in the first half of 2020-21 has been extended for a further period of 6 months till 31 March 2021. This will enable Centre and the states to borrow more, provided they are willing to do so.
The RBI has also increased the threshold of exposure to Small and Medium Enterprises (SMEs) from Rs 5 crore to 7.5 cr. These companies have a turnover of up to Rs 50 crore.
The announcements have also been made to enhance the financial inclusion. Another important measure was regarding rationalisation of the risk weights and link them to the loan-to-value (LTV) ratios for all new housing loans sanctioned up to March 31, 2022. This will increase the loan amount for the same value of property.
It also announced a 24X7X365 RTGS payment facility. The round-the-clock RTGS facility on all days of the year will be made effective from December 2020. The large-value RTGS system is currently available for customers from 7 am to 6 pm on all working days of a week (except 2nd and 4th Saturdays of the month). This system is expected to be a great enabler of small businesses and help them in seamless transactions as per their requirements.
In December 2019, the banking regulator had allowed a 24x7x365 National Electronic Funds Transfer (NEFT) system.
Positive Indicators
The September month has been benign in many ways indicating recovery on a sequential basis. Several indicators have seen an uptrend during the month, including themanufacturing Purchasing Managers Index (PMI), Goods and Services Tax (GST) collections, automobile sales, electricity consumption and e-way bills generated on the transportation of goods, getting back to the pre-covid level.
Sectors which hold potential for earlier recovery in comparison to other sectors include agriculture and allied activities; fast moving consumer goods; two wheelers, passenger vehicles and tractors; drugs and pharmaceuticals; and electricity generation.
Meanwhile, the services PMI for September stood at 49.8, indicating contraction, though it has grown from 41.8 in August.
The rural economy has also shown signs of resilience with Kharif sowing already surpassing last year’s acreage as well as the normal sown area, according to a media report.Monsoon has been good this year, which augurs well for the agriculture sector. Food grains production could cross another record in 2020-21, the report suggested.
Government’s flagship employment scheme under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) has been a saviour of migrant workforce to some extent, after an unplanned lockdown announcement was enforced. There are news of migrant workers getting back to work. This would ensure that the factories run and construction activity resumes further.
People’s expectations of a modest decline in inflation over the next three months is another small positive, that could trigger consumption.
Headwinds
While the RBI pegs contraction in GDP at 9.5 percent, the International Monetary Fund’s (IMF) assessment of the Indian economy presents an even bleaker picture with the contraction forecast of 10.5 per cent in this financial year. This is the worst for any major economy.