The RBI Governor Friday (April 17) announced a slew ofmeasures and relaxations as the nation slowly but surely sizes up the nature ofthe economic challenge that the lockdown poses. In today's announcement, theRBI has reduced the rate at which it absorbs liquidity (the reverse repo rate)to 3.75 per cent to discourage banks from parking funds with it. The change issignificant in that it tells us that banks are flush but don't know what to dowith their funds. There is no one to lend to, since economic activity is down,and so the funds end up in the vaults of the RBI to earn some interest. But ofcourse, this is precisely what the RBI doesn't want. It wants the funds to pourinto economic activity, but that is clearly not happening. The action todayalso tells us why the heavy drop of 75 basis points in the policy repo rate inthe Monetary Policy announcement of Mar. 27 was an action in vain. Thatsignaled that rates are down, so industry should borrow more. But this is sucha bind that the signal has largely gone unheeded.
All of this tells us that the monetary policy cannot be agamechanger in the special circumstances when a health crisis of monumentalproportions is leading an equally severe economic crisis.
The RBI today further announced steps like injectingliquidity through Targeted Long-Term Repo Operation (TLTRO 2.0) amounting toRs. 50,000 crore to make available funds for the banks to invest in investmentrated bonds, commercial paper and convertible debentures of the NBFCs,extending relief to real estate borrowers and NBFCs, enhancement of Ways andMeans Advances (WMA) to meet the State governments' cash deficit problems andrelaxation on recognition of NPAs.
But this is truly a difficult time for the economy. Retailinflation on a y-o-y basis for March 2020 has been estimated at 5.9 per cent,with food inflation of 8.76 per cent given that vegetables and pulses productswere at much higher levels of 18.63 and 15.85 percent, respectively. Theseestimates have only taken into account a partial survey that covers just 66 percent of the landscape. It may be notedthat for the past three months, the inflation rate has been higher than thespecified ceiling of rate of 6 per cent under the operational framework.
The RBI Governor has mentioned that inflation is on adeclining trajectory, so that the RBI has estimated that during H1 of 2021retail inflation will settle below the average inflation targeting rate of 4per cent. The Monetary Policy Report (MPR) released on April 9, 2020, said theinflation rate will be around 3.6 to 3.8 per cent. It will not be out of placeto mention that IMF in its World Economic Outlook report released on April 14,2020 also has projected a below 4 per cent inflation rate. How far this will becloser to reality is not known currently but inflation could well be higher. Iffuel inflation goes up due to the decision taken by the OPEC to cut production,controlling inflation at the average rate of 4 percent will be difficult.Similarly, anchoring inflation expectations at a lower level also seemsdifficult in the given circumstances.
Where is GDP growth headed? Surprisingly, neither theGovernor's statement today (April 17) nor the Monetary Policy Report has set outany clarity on growth for India. The Governor has taken shelter under the IMFprojection of 1.9 per cent growth in 2020 (January–December) and 7.4 per centgrowth in 2021. Further, the Governor opines that the recovery from the crisiswill be 'V' shaped. He echoed the IMFstatement that India is the fastest growing economy. It is good to reflect atthis time on the statement by former Governor Dr Raghuram Rajan in 2016 aboutIndia being the "bright spot" of the globe when other economies were down. To tellingand lasting impact, Dr. Rajan had then said: "I think we have still to get to aplace where we feel satisfied. We have this saying — 'In the land of the blind,the one-eyed man is king.' We are a little bit that way." That lesson is morerelevant today than it was in 2016.
The Governor of the fastest growing economy in any caseshould provide us some of our internal estimates of growth rather than rely onIMF projections. On the contrary, the Governor has mentioned that lowerinflation rate (which looks non- achievable due to the possibility of increasein food, fuel and services inflation as uncertainties loom large) will providepolicy space for growth revival. A v-shaped recovery is not a reality; it is ahighly optimistic projection by the IMF, and the RBI would have done well notto accept this statement as is. Once we admit that we are in a pandemic, and alockdown is the only solution, then how could growth be revived so soon, eitherfrom the demand side or from the supply side?
A large amount of liquidity has been injected into theeconomy with the objective of providing loans to the private sector. We do nothave real time basis credit deployment to various sectors and industries. In alockdown, how will credit offtake take place? There could be two options forthe banks. Park the surplus finds with RBI as option 1 and/or invest thesurplus funds in government borrowing programmes and government bonds as option2. The large scale liquidity which has been provided or will be provided by RBIby printing money in some estimates is around 3.5 per cent of the GDP, willhave the potential for a demand-pull inflation. Investment is unlikely to pickup soon.
The one area that deserves special attention and money isthe health sector. Credit should flow to health and health-related activities,agriculture and allied sectors. That should be a single point of attention andfocus, and also carries the added benefit of longer-term rewards that willleave us better off when the pandemic and the lockdown end eventually.
(R K Pattnaik is a former central banker and Jagdish Rattanani is a journalist. Both are faculty members at SPJIMR. Views are personal)
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