RBI May Have To Monetise Around Rs 7 Lakh Crore Of India’s Covid-19 Package: BofA

The government may have to ask the Reserve Bank of India to monetise about Rs 6.8 lakh crore of India’s Rs 20-lakh-crore Covid-19 economic package, Bank of America Securities said in a note on Thursday.

"Of the stimulus worth nearly 10 percent of GDP, 7.3 percentage points can be funded through many means. But the balance 2.7 percentage points or Rs 6.8 lakh crore will likely need to be monetised by RBI," BofA said in the note.

In an address to the nation on Tuesday evening, Prime Minister Narendra Modi called for an Aatm Nirbhar Bharat, or Self-Reliant India, to emerge out of the Covid-19 crisis. He also announced a Rs 20-lakh-crore relief package to spur economic acitivity stalled by a six-week-long coronavirus lockdown.

On Wednesday, Finance Minister Nirmala Sitharaman announced first tranche of the plan, focusing on MSMEs, NBFCs and the power sector. Thursday’s trache focused on migrant workers and farmers.

On Fiscal Impact Of Covid-19 Package

BofA expects the government to funnel Rs 20 lakh crore into the Indian ecoonomy without disturbing the fiscal balance much.

According to its India economists Indranil Sen Gupta and Aastha Gudwani, RBI has already funded exactly a quarter (250 basis points) of the amount through long-term repo operations, targeted long-term repo operations, a 100 basis-point cut in cash reserve ratio and credit lines.

• Welfare measures announced include 80 basis points of India’s gross domestic product with a fiscal impact of only 35 basis points of GDP.
• The government can go for extra borrowings of Rs 4.2 lakh crore, or 110 basis points of GDP.
• RBI can also issue bank recapitalisation bonds or draw from $127 billion from its revaluation reserves. This can work out to 25-50 basis points of GDP.
• The government can also issue PSU bonds worth 50 basis points of GDP.
• Credit guarantees offered would work out to 150-200 basis points of GDP for bank loans to MSMEs, NBFCs, etc.
• The remaining 270 basis points will likely need to be monetized by RBI.

BofA also noted that the Rs 3 lakh crore package announced for MSMEs, NBFCs and the power sector has only Rs 23,200 crore fiscal impact.

On Lockdown & Indian Economy

Gupta and Gudwani expect India’s Covid-19 lockdown to be extended till the end of June and a restart in economic activity only by mid-August. Due to this, the economy is likely to contract by 10 bps in 2020-21 as against 1.5 percent growth projected earlier.

They, however, have raised the 2021-22 growth projection by 50 bps to 8.1 percent.

“Our projections now factor in the lockdown till end-June from end-May earlier. We estimate that a month of lockdown costs about 100 bps of annual GDP. With rising labour dislocations, we expect the restart to stretch to 1.5 months costing about 120 bps of GDP," Gupta and Gudwani said.

Also Read: Modi’s Self-Reliance Call May Spell Protectionist Turn for India

India’s GDP is set to contract by 12 percent in the June quarter, they said. And if the world economy has to wait for a Covid-19 vaccine for, say, a year, then the domestic economy could shrink by 4 percent in the ongoing financial year. In response to that, RBI's Monetary Policy Committee will likely cut the reverse repo rate by 75 bps by October or earlier, they added.