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The Reserve Bank of India has taken the first step to combat the economic aftereffects of the pandemic’s second wave. Today, the RBI governor said that the situation has altered ‘drastically’ on the COVID-19 front with the second wave hitting India hard. Lockdowns have affected some of the major cities in the most affected states—and there are several of them—leading to a hit on their respective economies. The cumulative effect of these lockdowns is showing up in indicators that the RBI is tracking, enough to warrant some moves before the next MPC meeting. The main question is if the government also decides to join forces with the RBI with some fiscal measures.
The RBI’s measures are more targeted this time, rather than being a broad systemic one. Lending to the healthcare sector—vaccines, medical equipment, oxygen and diagnostics—is being given a push by allocating a term liquidity facility of Rs50000 crore for banks to lend to companies making these products or services. Banks can borrow from this facility at the repo rate, account for their on-lending as priority sector loans and also park an amount equivalent to their loans under this facility with the RBI.
If the healthcare sector was facing a funding constraint in tackling the second wave, then this measure can indeed give some relief to companies seeking to ramp up capacity by investing. But the needs of the sector are rather different. They are facing a severe constraint in handling the demand for appropriate healthcare facilities in the second wave. That requires scaling up in a very short time, which they may not be capable of doing.
It is the state that is having to step in and create facilities to manage demand for ICU/oxygen beds and to handle oxygen and medicine shortages. Pharmaceutical companies lowered their output of medicines used in COVID-19 because demand fell after the first wave ended. It is the government that must incentivise them to keep producing by building buffer stocks across states.
The same goes for vaccines, companies have not said they are not getting loans but need firm orders well in advance. If hospitals invest in creating surge capacity, once the surge subsides these investments may not earn the returns they are looking for. Also, a period of three years as tenor may be low since healthcare investments take a much longer time to pay back. But this can help companies who were anyway planning to borrow for their investment plans.
While the RBI can offer soft loans these have to be repaid ultimately. Private investment to tackle this surge in demand will be at risk when the second wave winds down. What if there is no third wave? The risk in this investment also needs to be covered since the private sector is being called upon to fill a gap in public healthcare. Fiscal support measures could cover some of that risk and leave the rest for the entrepreneurs to bear.
The RBI’s restructuring measures have been directed at individuals, small businesses and MSMEs, indicating that the RBI believes that bigger businesses can manage for now. The PMI for May supports its thinking, with the indicator coming in at a healthy 54. But this may not be uniform and while steel-makers may be in a good mood due to rising steel prices, automobile companies are hurting because their showrooms in key cities are shut. Their pain will go down the chain to component companies. Read here for more.
These measures may only be a start and the RBI has said it will devise new responses and ‘go unconventional’ when the situation demands. How far do these measures go in providing support to borrowers or banks who are likely to face some stress from the second wave? Read here to know more.
The ball is now in the government’s court to roll out counter-measures to support the economy. It has taken one measure in restarting the distribution of food grains to the needy. But small businesses are hurting and while the lockdowns are local in nature, there is a significant hit to economic activity from them being imposed across states. Since parts of the economy are generating revenue for the government—April saw healthy GST collections—it is reasonable to expect this revenue can be used to support those suffering from the second wave. Will the government bite the bullet?
Investing insights from our research team:
RBL Bank – Risk takers’ stock to play post-COVID recovery
RBI’s liquidity booster shot offers partial relief, economic immunity will be raised only by mass vaccination
SIS: Post COVID recovery and shift to organised players, strong tailwinds for investors
What else are we reading today?
Can GST mop-up momentum continue?
The world must unite to combat vaccine imperialism
SBI Life’s demand-driven approach is yielding good dividends
RBI steps in for retail borrowers: Offers fresh restructuring, extension for recast loans
Our chartists’ technical calls for the day (Please note these calls are published before the markets open on trading days): Infosys, Jubilant Ingrevia and GAIL