The RBI’s Emergency Toolkit: What It Could Look Like
Economists say that the RBI has a far wider toolkit with which it can tackle emerging problems.
Global central banks have stepped up emergency measures as the novel coronavirus continues to spread.
Overnight, the U.S. Federal Reserve slashed its fed funds rate by a percentage point to near zero and promised to boost its bond holdings by at least $700 billion. The Fed, Bank of Japan, European Central Bank, Swiss National Bank, Bank of Canada and Bank of England also announced swap lines to support the international supply of the world’s reserve currency.
In India, so far 107 cases of the Covid-19 have been detected. In response, the government has put in place overseas travel restrictions while some state governments have asked facilities such as theaters and malls to remain closed.
With global and local concerns rising, the focus has increased on emergency action from the Indian central bank.
The Reserve Bank of India has stayed away from emergency interest rate cuts but economists believe that the RBI has a far wider toolkit with which it can tackle emerging problems even if waits until its scheduled meeting in April to announce a cut in interest rates.
The toolkit could range from providing support to the foreign exchange market to stepping in to meet any local liquidity needs with tools ranging from the cash reserve ratio to long term repo operations and open market purchases of government bonds. The central bank, which is also the banking regulator, could also provide targeted relief to stressed sectors by either designing ways to provide liquidity or offering relief in bad loan classification.
While the central bank is dealing with a fast-changing situation, former RBI governor D. Subbarao says that the regulator should ideally stay away from sector-specific measures.
On Monday, the central bank will conduct a $2 billion sell/buy forex swap, providing US dollars in the face of heavy outflows. To counterbalance the effects of the forex swaps, the RBI had offered short term liquidity via repo operations on Friday but the facility remained unused.
BloombergQuint spoke to economists to judge what they thought the RBI would further do.
Radhika Rao, DBS Bank
Apart from rate cuts, the RBI has been preemptive with non-monetary measures, for instance, the temporary forex swaps facility announced, said Radhika Rao, economist at DBS bank. Other steps may include more targeted long-term repo operations for banks, tied to end-use of funds. This might help sectors directly affected by Covid-19 or segments which were already under pressure such as small businesses, the logistics and tourism industries.
Another tranche of the umbrella LTRO might be also in the works, Rao said.
Priyanka Kishore, Oxford Economics
The central bank’s immediate response may come through more LTROs to keep banking liquidity flush, said Kishore. This would also ensure that funding liquidity for non bank lenders doesn’t seize up again in the wake of the Yes bank crisis, she said.
For troubled sectors, the RBI could announce special lending schemes, interest rate subventions and/or adjustments in risk weights that determine the amount of capital that banks set aside against lending to those sectors.
Interest rate cuts will also come.
Kishore forecasts at least a 25 basis point cut before or at the time of the April monetary policy committee meet.
Ananth Narayan, SPJIMR
The immediate response will likely be focused on the markets. The RBI is already protecting the rupee in a big way, said Ananth Narayan. From here on, another round of LTRO and interest rate cuts will be the most awaited steps, he added.
Other measures may also be taken in consonance with the government. A short term forbearance on classification of bad loans will be justified, especially to those sectors directly impacted by the possible slowdown. The RBI already has schemes for forbearance to real estate and SMEs, he said, adding that while providing relief for six months is fine, forbearance is broadly unlikely to help.
In 2008-09, the central bank had also set up a a vehicle to provide financing for NBFCs. So far, it has resisted doing that directly, but if push comes to shove, the RBI might once again consider an SPV for NBFCs, Ananth Narayan said.
Rahul Bajoria, Barclays
The RBI is better off continuing with unconventional monetary policies such as LTROs, since it helped reduce term premia and corporate borrowing spreads, while simultaneously providing an impetus for banks to lend money.
However, given the rapidly deteriorating global sentiment, falling asset prices and possible credit pull-back in light of a moratorium placed on Yes Bank, we sense that the RBI will need to reconsider large interest rate cuts, especially given steeply dropping energy prices, which will ultimately depress inflation in coming months.
Bajoria, forecasts that the central bank will cut rates by at least 65 basis points by June, with risks tilted towards more easing than this. Over and above these measures, the RBI does not have a big role in the current scenario, said Bajoria.
The partly informal nature of sectors most impacted, along with the seasonality in these sectors, is challenging. While the informal parts of the sectors would benefit from income transfer support, for larger companies, the government could consider some sort of a tax holiday.
Charan Singh, EGROW Foundation
The government and the RBI will have to swing into action very quickly.
They have to build a scenario analysis and see what is happening. One thing is clear, demand will sag and production will fall. The spiral has started and tourism, travel hospitality are already suffering. Banks exposed to these can be asked to restructure loans.
Interest rates will have to be lowered dramatically sooner or later, said Singh, who was formerly the RBI chair professor at IIM-Bangalore. The government will have to think of bailout packages for tourism, hotels, airlines and so on, he added.