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RBI’s Monday presser leaves two vital questions unanswered

The RBI was expected to cut rates; but oddly there was no sense of urgency seen in its top brass about the deadly coronavirus outbreak.

March 16, 2020 / 07:26 PM IST
Reserve Bank of India (RBI) Governor Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das

Everyone expected an emergency rate cut from Reserve Bank Governor Shaktikanta Das when he rushed for a presser on Monday evening. Analysts were only debating the quantum of expected cut—50 bps or a much aggressive 100 bps. Their expectations were genuine given that the world over, central banks have cut rates. But all that came from the governor was a continuation of liquidity easing measures. There was no sense of urgency seen in the RBI top brass about the deadly coronavirus outbreak. The two announcements on liquidity—continuation of dollar swap operations and long-term repo auctions—are indeed positives to the markets but no substitute to a stimulus to counter a global pandemic.

Two questions arise. One, Das’ explanation suggests that only monetary policy committee (MPC) can act on rates, not the RBI, and hence rate cuts can’t be announced by the RBI abruptly is technically correct but a bit surprising. In an emergency scenario, the MPC could have always met even before the policy review date to announce a policy stimulus. Das himself said nothing can be ruled out. If the RBI pushed its case for a rate cut, the MPC will have to act. The RBI governor has veto power in the panel. It appeared that the RBI is not keen on an early rate cut. But that doesn’t go well with Das’ earlier comments. Just early this month, in an interview with Bloomberg news, Das had made a statement that there is a “strong reason for coordinated policy action" among the central banks in the context of the coronavirus problem. During the presser, Das himself admitted that coronavirus can potentially impact India. Still why the RBI isn’t acting yet to do what it is preaching? What is the merit of delaying a rate action? There were no clear answers from the RBI top brass on why the central bank chose not to participate in the global coordinated monetary policy action by central banks. The US Federal Reserve, on Sunday, announced the biggest emergency measures since the 2008 global financial crisis to fight the virus scare.

The counter-argument to an RBI rate cut is that rate cut in the Indian context may not be making too much sense. That’s partly true. In an economy where the demand scenario is weak, lowering the borrowing cost alone may not work. But that is the case in other economies too where central banks have announced massive rate cuts in the backdrop of an unusual global pandemic. A significant rate cut in India too would have calmed the financial system and offered a sentimental booster. Also, the RBI could have announced measures to help small companies that are severely affected by the demand slump. For instance, while there is an existing provision for the restructuring of MSMEs, this applies to only a small section of loans up to Rs 25 crore. The central bank could have increased this limit as the majority of companies are likely to suffer on account of coronavirus effect on businesses. Businesses, suffering from the present scenario, could have been given a few months’ time to delay their payments to banks so that those loans won’t turn NPAs. But none of these came from the RBI on Monday, except a general advisory to bans to exercise caution on coronavirus spread.

Two, throughout the presser, Das and his deputies assured Yes Bank depositors that their money is safe. Coming from the RBI governor, that statement is absolutely reassuring for thousands of Yes Bank depositors who are likely to rush to ATMs once the moratorium will end on March 18. But Das’ response to a few questions on Yes Bank crisis and the RBI’s approach towards the case were puzzling. The fact that the RBI knew long back what’s going wrong in Yes Bank. Till March, the central bank found a divergence of only Rs 3000 crore in Yes. A quarter later, the kind of bad loans emerged from Yes Bank’s books were much larger. At the end of March, Yes Bank has Rs 40,000 crore bad assets out of which Rs 39,000 crore is corporate NPAs. It’s capital adequacy ratios were just above the minimum level. Why didn’t the RBI act early and put the bank under prompt corrective action (PCA) to avert further damage? The central bank had put several other banks under PCA which had seen a spike in NPAs, deterioration in financials and corporate governance issues? There were no clear answers. Das responded to the reporters to this question saying the RBI looks at the larger picture and does not operate in a mechanical manner. That wasn’t a very convincing answer.

The RBI governor’s presser was more focused on the Yes Bank crisis than the Covid-19 outbreak.
Dinesh Unnikrishnan
first published: Mar 16, 2020 07:13 pm

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