The monetary policy committee (MPC) has made a big bet on growth. It has temporarily ignored the inflation risks, in an attempt to look past the Covid-19. It hasn’t cut key rates but has done almost everything else to make the monetary policy even more accommodative. That isn’t surprising with the growth projected to contract 9.5 per cent this fiscal and demand situation remains a worry.
With inflation concerns remaining elevated, no one really expected a rate cut from the MPC today (October 9). But the RBI has done what it could best at this juncture—make a bigger liquidity cushion available for banks and NBFCs to restart lending as and when loan demand picks up.
The liquidity measures, be it the on-tap TLTRO (targeted long-term lending operation), higher weekly OMO (open market operations), will give more confidence to smaller firms which are in need of liquidity support. So far, only bigger companies have benefited from the liquidity measures announced so far as part of Covid package.
Right now, bigger companies already have sufficient liquidity, hence the additional measures announced would likely benefit smaller firms with relatively low rating. At least that is the expectation. Smaller firms can now approach banks for loans made available through the TLTRO route.
Clearly, of a host of measures announced, TLTROs on-tap are most important. The RBI has already conducted several rounds of LTROs and TLTROs already infusing significant amount of liquidity in to the banking system. Today’s measures will be continuation of the liquidity measures. The on-tap TLTRO will have tenors of up to three years for a total amount of up to Rs1,00,000 crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021 with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme.
What is important is that banks can use the money drawn under the on-tap TLTRO to extend bank loans to specific sectors. In earlier TLTROs, this facility was absent. “The liquidity availed under the scheme can also be used to extend bank loans to these sectors,” Das said. Besides TLTROs, the RBI has already announced it will conduct OMOs on state bonds and higher weekly OMOs to facilitate comfortable liquidity conditions in the banking system. The decision to buy state bonds will be helpful to bring down the state government bond yields and thus down the overall borrowing cost.
The question is if there will be enough appetite in the banking system for loans where the excess liquidity can be of use. So far, the credit growth has remained muted particularly when it comes to small industries. In the absence of demand, the excess liquidity will not be of much use.
The big message
There is a clear shift in the MPC stance from inflation focus to growth supportive measures even without tinkering with rates. The governor began his address emphasizing the likelihood of a growth revival by the fourth quarter and signs of recoveries already seen in certain sectors.
Going ahead, the MPC seems to be inclined towards a rate cut going ahead if inflation concerns eases. The tricky part to watch will be which direction inflation takes. In August, the CPI inflation remained high at 6.7 per cent. During his address, the governor said inflation may stay high in September but may ease in the subsequent months.
If inflation eases, one cannot rules out a 25-50 bps rate cut in the remainder of the year. The MPC remains on an ‘accommodative’ stance and has reiterated the willingness to act when required. The ‘doves’ have dominated the show for now in every aspect of today’s policy except that there is no rate cut. But the ‘hawks’ will have their say if inflation refuses to moderate.