Thinking outside the box in these testing times

3 min read . Updated: 09 Oct 2020, 10:32 PM ISTSoumya Kanti Ghosh

The MPC’s decision to continue with the accommodative stance, if necessary, into the next financial year will support the momentum building up in high frequency indicators

Glory comes not only for inventors but also for innovators. The famous American scientist Thomas Alva Edison was a rare breed who was both and, therefore, a legend. In a similar vein, the Reserve Bank of India (RBI) governor has innovated admirably through a bouquet of regulatory and developmental policies that is in complete sync with the coordinated task of both the government and the central bank in reinvigorating the economy. Despite the existing IT framework, the governor did not get fixated with a one-point agenda and dared to look through the inflation print. It was a matter of bold conviction to emphasise that the cost of borrowings was the lowest in 16 years, juxtaposed with the tail event of the pandemic, and the largest government borrowing in the history of Independent India!

The monetary policy committee (MPC) has decided to keep the rates unchanged, but use targeted funding for growth revival in some key sectors that have both backward and forward linkages with growth. The MPC’s decision to continue with the accommodative stance, if necessary, into the next financial year will support the momentum building up in high frequency indicators. With the global economic outlook clearly uncertain, risks have risen with the renewed surge in infections in many countries. So, the policy put larger weight on domestic revival. The gross domestic product (GDP) is now officially expected to contract to -9.5% for FY21, and grow 20.6% in Q1 FY22. Inflation is expected to be within the band by March 2021, but the current elevated levels owing to supply shocks have placed the policy choices on a precarious footing with limited options to play.

The targeted funding of specified sectors under the targeted longer-term refinancing operations (TLTRO) is a good move, as risk aversion and uncertainty has made lending decision challenging. The extension of the held-to-maturity (HTM) arrangement at 22% of net demand and time liabilities (NDTL) till March 2022 is also a good move from both banks’ and governments’ point of view. The current decision of open market operations (OMO) for state development loans (SDL) will help in improving the liquidity and facilitate efficient pricing.

RBI has used the exposure limits and risk weight in the past to its advantage by using the ratio tools to steer flow of credit. Accordingly, this policy has rightly decided to increase this threshold of regulatory retail portfolio to ₹7.5 crore in respect of all incremental qualifying exposures, which will benefit small businesses. It also decided, as a countercyclical measure, to rationalize the risk weights by linking them only with loan-to-value (LTV) ratios for all new housing loans sanctioned up to 31 March 2022. Such loans shall attract a lower risk weight when LTV is less than or equal to 80%, and a larger risk weight when it is over 80% but less than or equal to 90%. This will help banks save capital that could be offset against lower housing loan rates.

The announcement to operationalize the bank-NBFC(non-bank financial company) “co-lending model" further to cover housing finance companies (HFCs) combines the best of two sectors – the resource availability of banks and the reach of NBFCs to best leverage the respective comparative advantages. The decision to make RTGS transactions available 24x7 will give thrust to mobile payments, particularly for high-ticket segment.

Now, some titbit. While a new MPC has been formed, going by past experience, even as external members have always talked about the overall conditions in the economy, the various nuances on aspects such as liquidity, width of the LAF corridor, and other aspects of practical financial management were never elaborated in MPC minutes. This lack of linkage between the more practical approach to things and theoretical knowledge makes the weightage of internal RBI members opinion always heftier.

Finally, by stretching that, “Central Bank and Markets should be in a competitive equilibrium", the RBI governor has adroitly communicated to the market of henceforth synchronization of auction outcomes with RBI’s expectations!

The author is group chief economic advisor, State Bank of India. Views expressed are personal

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