BackAll eyes on quantum of RBI’s G-SAP plan in Jul-Sep quarter
The resumption of consumption demand will depend, to a large extent, on fiscal response as RBI’s monetary policy has more or less run its course, having provided initial support during the intense phase of the lockdown and recovery
PremiumThe market expects the central bank to expand its bond buying programme in the second quarter of the financial year with an addition of another ₹1-1.5 trillion, said Saugata Bhattacharya, chief economist at Axis Bank.
The three-day meeting of Reserve Bank of India’s (RBI’s) monetary policy committee will conclude on 4 June. The rate-setting panel is likely to hold key policy rates over fears of rising inflation.
“One of the key announcements or indications that we are looking for in the policy announcement is an extension for the G-SAP programme. Markets are expecting another ₹1-1.5 trillion of G-SAP in the second round," Bhattacharya told reporters on Thursday.
In April, the central bank announced secondary market sovereign bond purchases of ₹1 trillion under the government security acquisition programme (G-SAP). Experts now believe that RBI might expand this programme to support the burgeoning borrowing programme.
According to Bhattacharya, while it was feared that the banking system’s ability to buy government bonds will be significantly reduced thanks to an uptick in credit growth, that revival is yet to firm up. Therefore, lenders will still have more room than was originally anticipated.
“Remember that last year, there was a significant support to the government’s borrowing programme from the banks because there was no credit opportunity. Moreover, with RBI’s liquidity infusion, banks had to buy some statutory liquidity ratio (SLR) bonds in search of yields," he added.
On demand recovery, Bhattacharya said it will probably need government spending.
“Even as of late May, cash balances of the Centre with RBI were above ₹2.3-2.5 trillion. So, the question now is why the government is still not spending and if the government needs to spend more, should it carry on with the high capex announced in the budget or divert some of that in more immediate revenue spending to beef up the MNREGA programme and have more cash products for SMEs," he said.
The resumption of consumption demand, he said, will depend to a large extent on the fiscal response as RBI’s monetary policy has more or less run its course, having provided the initial support during the intense phase of the lockdown and recovery.
“We hear that the government is waiting for the lockdowns to ease because that is when the true fiscal stimulus has the largest multiplier effect on demand and spending. I hope they spend soon," said Bhattacharya.
He explained that while the government consumption will somewhat offset the relatively low private consumption, everybody is still trying to understand how much of overall savings might have been depleted.
“We only have the numbers till September last year and it is perfectly likely that the second shock would have impacted household savings. If that happens, the ability of households to shift some of their built-up savings towards consumption will remain limited," Bhattacharya said, adding that consumption is likely to remain impacted at least till the December quarter of FY22.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
