Boosting resilience against the 4 Cs

The prospect of a global slowdown has increased after the lockdowns put in place by most important economic engines of the world. Global central banks have responded, often going to unprecedented lengths, supplemented by large fiscal stimulus measures.

India’s economic environment is being shaped by an adverse confluence of four Cs: Credit, COVID, crude and confidence. The previous fortnight was especially impacted by the lockdown, which will affect payments, transactions, credit flows and increase market volatility.

Given the limits of fiscal stimulus, monetary policy, in its increasingly liberal interpretation, has assumed the role of primus inter pares in the multi-dimensional measures. The Rs 1.7 trillion fiscal stimulus unveiled on Thursday is part of a coordinated approach. But unlike in other economies, India does not have the resources to roll out large spending packages.

The uncertainty is sufficiently large that RB I was dissuaded from releasing projections of growth and inflation for FY21. Even as analysts work on projection ranges and scenarios, a starting point of 4 per cent FY21 GDP growth would not be amiss. Of even bigger concern, given the prospects for low expected inflation, will be weak nominal GDP growth, probably even lower than the 7.5 per cent expected for FY20. This is likely to have adverse consequences for tax revenues, corporate cash flows, and credit growth.

The first line of defence in the monetary policy quiver is a cut in repo rate. While many have questioned the effectiveness of rate cuts in an environment of credit risk aversion, there are two dynamics now at play, which make this potent. First is the broadening set of credit instruments, particularly to MSMEs and retail, where lending rates are now benchmarked to market rates, including the repo rate, which automatically induces transmission. Second, provision of large amounts of durable liquidity to banks at progressively lower rates gives banks the buffer to absorb lower yields on loans. Ancillary measures (cash reserve ratio cut), forbearance on capital, will add to this, together with a gentle nudge against parking funds at the low interest rate RBI reverse repo window.

An immediate increase in credit offtake is unlikely. The measures to defer recognition of delayed payments on loan installments will give banks time to design prudent restructuring of loan covenants.

There are multiple other operational issues in freeing up credit. The last words of the RBI governor’s statement were “Go digital”. Financial contracts inherently involve a lot of paperwork. One example is as follows. Letters of Credit issued by Indian banks to beneficiary banks in other countries for importing goods. How do these offshore banks send documents, when courier services are not functioning? Can the issuing and beneficiary banks be allowed to accept and authorise digitised documents? Will Customs accept digitised acceptance of issuing and beneficiary banks to allow importers to permit delivery of shipments?

The confluence of multiple shocks — demand and supply, financial and real, domestic and global — will take time to dissipate. The RBI (and other) policy measures, will help boost the resilience of the system.

The writer is the Senior Vice-President, Business and Economic Research, Axis Bank