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RBI governor Shaktikanta Das,
RBI governor Shaktikanta Das,

RBI’s Das says ‘we shall overcome’, but finds no chorus from markets

RBI’s off-cycle 40 basis point rate cut is seen as a signal, rather than a big impact

The off-cycle 40 basis points rate cut by the Reserve Bank of India (RBI) was met with a shrug from the markets. Yields fell by 7 basis points (bps) on Friday, while equity indices remained in the red, with stocks of banks and financial services firms falling the most.

Economists said the 40 bps policy rate cut was more about signalling rather than actual outcomes. As such, short-term rates have already crashed below the policy rate due to surplus liquidity.

Graphic: Santosh Kumar Sharma/Mint
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Graphic: Santosh Kumar Sharma/Mint

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“It (rate cut) should ease the cost of credit further. However, in the absence of demand for credit and extreme risk aversion among banks, we remain doubtful about its effectiveness in stimulating growth," said Anagha Deodhar, economist, ICICI Securities.

The good news is that the central bank showed its will not to waste time in reacting. “This is more about saying that we are alert and aware of the situation rather than the actual impact," said an economist of a foreign bank, requesting anonymity.

Also, the life of the borrower has been made easy. Interest on working capital can now be deferred up to 31 August. This interest portion can be converted into a term loan and repaid by March 2021. In short, the borrower has more time to repay. Meanwhile, the moratorium on loan repayments was further extended to 31 August.

But the measures were to ensure survival of businesses, especially small and medium enterprises that are struggling to stay afloat. It was also to ensure lenders don’t get hurt due to rising defaults. Whether defaults will rise once the moratorium is over is another story, for another day. For now, the red flags on bad loans are best not raised.

While survival is key, recovery from the pandemic is also crucial. The demand destruction for businesses has been immense under the lockdown with quarantined consumers unable to buy beyond essentials. As economic activity resumes slowly across the country, reviving demand should be next on the agenda.

State Bank of India chairman Rajnish Kumar said the measures will help revive the economy, but offered little clarity on how this will come about.

To be fair, the central bank, too, had little clarity on the pace of recovery. What it knows is that the economy will shrink in the current year. Considering the trend in inflation, expected to be downwards, the RBI can do more to revive growth.

Further rate cuts have not been ruled out and what stands out is this statement from governor Shaktikanta Das: “The RBI will continue to remain vigilant and in battle-readiness to use all its instruments and even fashion new ones, as the recent experience has demonstrated, to address the dynamics of the unknown future."

For now, markets were not willing to look beyond the trials towards triumph.

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