View: RBI running out of ammo to fire up economy, banks

The RBI governor was hawkish on inflation, dovish on liquidity and neutral on his continuation. Given this combination, it is not surprising that both bond and equity markets paid only passing attention to the monetary policy. But beyond the short term takeaways for the market, the RBI appears to be running out of options to help the economy or the banks. Firstly it appears the space for rate cuts is exhausted, even if the governor stopped short of saying it. According to the statement the stickiness in services inflation comes from high water charges, tution fees, house rents, auto and cab fares. Even with a good monsoon and better capex by the government, the prices of these elements aren’t likely to fall. And food inflation, which stands at 6.3 percent has to fall very sharply in coming months to pull down the headline. This appears tough given the supply dynamics in items like sugar and pulses. And finally, with the seventh pay commission and OROP, CPI is more likely to overshoot 5 percent in Jan 2017 eliminating any chance of a rate cut.The governor argued that while he doesn’t have space to cut rates now, banks do. But bankers don’t seem to buy the argument. Many of the big banks want to see how much deposits they will lose when the FCNRB deposits leg it out in September. In any case most of the large banks are way too laden with bad loans and will prefer to pad up their margins so that they can find some money for their ever increasing provisioning needs. What’s worse the benefits of MCLR reductions are not reaching those pegged to base rates. For a large number of borrowers, it may be end of the rate cutting cycle.The biggest stalemate, however, is in the resolution of bad loans. The strategic debt restructuring mechanism has failed with banks unable to find buyers even for smaller companies. The bandwidth of the existing asset reconstruction companies and stressed asset funds can’t cover even 5 percent of the bad asset load of 5.3 lakh crores. The new source of hope is two funds that are proposed to be created by banks - a Stressed Asset Equity Fund that will invest in equity of stressed companies and a Stressed Asset Loan Fund that will provide working capital to companies declared NPAs and hence unable to get bank loans. The RBI is emphatic that banks should be minority owners of this fund. It is proposed that banks will contribute 5 percent of the kitty each, the government’s NIIF will contribute another slice and other global stressed asset and private equity funds will chip in some funds. While the plan sounds good, it doesn’t appear anywhere close to getting implemented. The ability of banks with seriously stressed balance sheets to put together a decent corpus for not one but two stressed asset funds looks difficult. Matching funds from the yet-to-be-constituted NIIF fund looks even more distant. If foreign funds haven’t yet been roped in for the NIIF, getting them interested in a stressed asset fund is well nigh impossible. And if it is going to be entirely owned by public sector banks and the government’s NIIF, won’t it have all the ills of a bad bank, that the RBI precisely wanted to avoid? As monetary authority and as banking regulator, RBI appears to have limited options to help, as the bad asset tally heads to may be 6 lakh crores before long. Its inflation targeting role may absolve it of growth responsibilities. But that is small comfort.