Views on MPC by Members of the EGROW Shadow MPC

1. Dr. Arvind Virmani, Chairman EGROW Foundation

There is an unprecedented shock to every economy in the world, including the Indian economy. It practically immobilizes the workforce and thus reduces production to zero in 80-90% of economy.

As in the previous Financial Crisis, the Monetary Authority has now to ensure, that the Financial System keeps functioning smoothly and liquidity issues don’t undermine Solvent Financial institutions and result in Contagion from insolvent companies and financial organizations. RBI must ensure that key Institutions (like Banks) have enough liquidity, critical financial markets, like those for Foreign exchange, have adequate liquidity and Critical Instruments like Government Security do not show any upward spikes in rates. The last also requires close Monetary-Fiscal Co-ordination. RBI has also to ensure undue rise in risk premiums on undeveloped markets like those for CPs, by ensuring enough general liquidity and negative real Repo rates. RBI as an institution has sufficient experience from the Global Financial crisis to deal with these issues.

The nodes, channels and networks through which real problems translate into financial crises and propagate are well known since the Financial Crisis. The RBI has to provide sufficient short, medium and long term liquidity to ensure that the Banking and other critical financial institutions, all critical markets (e.g. Govt Secs) continue to function smoothly and key instruments which are normally liquid and widely used, remain largely so. RBI also has to identify borderline institutions and devise specific measures to ensure that they don't collapse and set of contagion, and systemic failure.

In this context, Real Repo rates are a very important tool for signalling & giving confidence to solvent financial agents that the RBI will do whatever it takes to ensure system stability. They must be negative for duration of crisis. This is also the best (rational and easiest to implement) way to provide a cushion to solvent borrowers, including cash strapped ones. In this time of Govt mandated lockdowns and pandemic related shutdowns.

As government announced a Rs. 1.7 trn fiscal stimulus, the RBI introduced its own version of the stimulus package which includes a number of measures to ensure financial stability and to stem the economic fallout from the spread of the coronavirus. Both packages are rightly designed to deal with the impact of the lockdown, which covers 80-90% of the economy, and the succeeding 4-6 weeks. The best part is the assurance that the government now has its ear to the ground and using information to design and modify packages. The challenge is, therefore, shifting to effective implementation. As states are responsible for both health and welfare, effectiveness of health and social welfare measures depends on the states, who are actually present at ground level. The FRBM (Fiscal Responsibility and Budget Management Act) should be suspended or reformed to take explicit account of such crises. Ignoring fiscal deficits during the crisis to institute temporary expenditure does not mean irresponsible commitment to medium-term schemes, which will sink the deficit in the medium-to-long term.

2. Prof. Ashima Goyal, IGIDR and Member, PMEAC

The most remarkable aspect of the pre-poned monetary policy statement made on the 27th March was the focus on financial stability. Inflation targeting that had dominated past MPCs now played second fiddle. This was warranted in view of stresses in both equity and debt markets. The large rate cuts and liquidity injections should help calm markets. The interest rate cuts are not meant to stimulate demand. That will not happen since supply is shut down in a lockdown. Even so, since inflation is falling with the collapse of oil prices, as is global and domestic demand, the cuts are also consistent with flexible inflation targeting.

Other notable aspects are, first, signs of listening and responding to valid needs. The time given to close books and meet regulatory requirements is required as the lockdown freezes activities. That remissions are temporary reduces possible moral hazard.

This points to a second aspect: the attention paid to incentives. For example, that cheap LTRO can only be utilized for on-lending, parking excess liquidity with the RBI will earn very little, and corporate bonds will not have to be marked to market will all induce banks to lend. The cut in CRR and more time given to meet Basel norms will improve bank profitability, allowing them to reduce loan rates even if deposit rates have to remain competitive.

But so far the RBI continues to rely on banks for rate and liquidity transmission. They have more fire-power they have kept in reserve. If the above steps prove inadequate, or support is required for a larger fiscal push as supply revives, they can step in themselves with OMOs and other types of refinance. While the stimulus is large and well-thought through, there is room to calibrate it further as the situation and needs evolve. Effective policy is correctly sequenced.

3. Indranil Sengupta, Chief Economist, Bank of America Merrill Lynch

We welcome RBI Governor Das's 75bp RBI rate cut (25-50bp BofAe) to counter the COVID 19-related shutdown. The RBI MPC met before its April 3 date to vote 4-2 in favour. The RBI reverse repo rate cut works out to 90-115bp after the enlargement of rate corridor. Looking ahead, we expect the RBI MPC to cut 25bp each in June and October. Second, Delhi would likely follow up with a fiscal stimulus (of 1-1.5% of GDP), funded by RBI OMO. Finally, the RBI could continue to intervene up to US$30bn to stabilize the INR. It could also likely try to augment FX flows by incentivizing exporters to bring back proceeds, raise the cost of import finance and hike rupee NRI/FCNR deposit rates.

4. Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

The RBI’s comprehensive policy should help in lowering system-wide funding costs, ease near-term financial stress, and provide financial relief to stressed sectors. The effective rate cut of 90bps has been a welcome move and given a moderating inflation trajectory, the MPC can further reduce rates by 50 bps in response to the further spread and impact of Covid-19. Additionally, we expect RBI’s focus to continue to remain on providing adequate liquidity both system wide and targeted. Notably, while RBI’s recent liquidity measure collectively is expected to provide liquidity to the tune of Rs 3.74tn, we believe that due to the moratorium of term loans of up to 3 months, the effective liquidity infusion will be much lower as Banks’ LCR requirement may increase. Nonetheless, we expect the overall easy liquidity and weakening credit demand to keep structural liquidity conditions benign and avoid further tightening of financial conditions. However, it need to be noted that in order to address the economic shock to the economy, we need is a coordinated monetary and fiscal aggressive response. The government may need to step up its ammunition to avert any further shocks, even though any immediate revival in activity looks difficult. Aggressive fiscal measures will further strain the already strained public finances and additional market borrowings could result in significant dislocations in the financial markets weighing on the transmission. We thus expect RBI to step in further to absorb the excess supply through either aggressive OMO purchases or even partial monetization of the deficit.

5. Mr. Abheek Barua, Chief Economist and Executive Vice President, HDFC

A day after the government announced a Rs. 1.7 trn fiscal stimulus, the RBI introduced its own version of the stimulus package which includes a number of measures to ensure financial stability and to stem the economic fallout from the spread of the coronavirus.

The RBI’s measures went beyond the market’s expectation, particularly in regards to the magnitude of the policy rate cut (delivered 75bps, market expectations of 50bps) and the CRR (Cash Reserve Ratio) reduction. In terms of forward guidance, the RBI highlighted its “whatever it takes approach” saying that it would deploy all instruments - both conventional and unconventional tools – if required in the future.

While the repo rate cut delivered was sharp, transmission to borrowing costs for severely hit sectors (such as aviation, hospitality etc.) could remain limited. That said, other liquidity infusion measures (through CRR cut, MSF cut and TLTROs) are likely to be more supportive by pushing credit growth and providing durable liquidity in the system. Moreover, the moratorium announced on the instalment of term loans for three months is likely to cushion cash flow pressures for firms and individuals that are reeling under the pressure of the 21-lockdown. The forbearance in terms of classification of these loans is also likely to bring some relief in terms of NPAs for banks and NBFCs.

That said, the fact that unlike the Fed or the ECB, the RBI did not announce direct purchases of corporate bonds or CPs and instead passed the buck on to the banks, is what could have led to the initial market disappointment post the policy meeting. Moreover, it was disappointing to see no special credit facilities for the worst hit sectors like aviation, hospitality etc. and an absence of direct liquidity support for the NBFCs. Therefore, we think that a stimulus 2.0 could be required in the coming days to help credit starved sectors if the usual monetary transmission levers are not as effective. Unprecedented times warrant unprecedented measures.

On the macroeconomic outlook, the RBI refrained from providing estimates on growth and inflation, given the uncertainty around the spread, intensity and duration of COVID-19. Although, the central bank said that macroeconomic risks, both on the demand and supply side, could be severe. On inflation, the RBI expects price pressures to soften going ahead given dwindling demand conditions due to the lockdown and the drop in crude oil and food prices. We expect GDP growth at 3.2-3.5% in FY21 down from 4.8% in FY20.

6. Dr. Charan Singh, CEO and Director, EGROW Foundation

The most important thing to recognize is that Governor advanced the MPC by more than week, given the grim situation. This reassures the market that the RBI, regulator and supervisor of the financial system, is alert and pro-actively working.

On forecasts of GDP and inflation, the RBI did not provide any, given the uncertainty prevailing in the global economy. On measures, the RBI was very accommodating and announced a moratorium. To ensure liquidity, the cut in CRR was announced. The Repo rate was lowered by 75 bp and the window/band between Repo and Reverse Repo was widened to encourage banks to lend. The Governor provided forward guidance which must be appreciated, given difficult times.

Going forward, the situation of production and trading in the economy will continue to suffer for at least next 3 months. The crude prices are low and expected to continue for some more months. Inflation could be low too. In view of large scale unemployment and disruption in the unorganised sector, demand will be low too. The stress of the corporate sector and businesses will reflect on the balance sheet of commercial banks. Therefore, the Govt and the RBI will have to be prepared for assisting the banks I would expect another round of big decline in Repo Rate and further widening of the corridor between Repo and Reverse Repo. The RBI may also consider pressing a pause button on the Basel Norms, especially on risk weights, to facilitate banks to accommodate firms/corporates with shattered businesses. Thus, easy monetary policy is expected to continue for some more months.

Finally, the RBI needs to have a sectoral approach to help revive the economy. The standing crop of Wheat in North India could adversely impact the banking sector, given agricultural loans. The MSMEs have come to a grinding halt. The area of aviation, tourism, travel and transport is badly impacted. And something focussed on these would have to be announced. The revival of the economy would start sometimes in June/July, and the supporting RBI's Monetary Policy will be helpful in the process.

Views on MPC by Industry Experts/Economists

1. Dr. Meenakshi Rajeev, RBI Chair Professor & Managing Editor, Journal of Social and Economic Development, Springer

Today, the global community faces a crisis of unprecedented scale in the form of the rapid spread of the novel corona virus across the world. This highly contagious disease has forced Governments of every country to resort to lockdowns for periods much longer than have ever been witnessed before. During this time of emergency, the health and economic challenges that are faced by a developing country like India are different in several respects compared to a developed nation. The plight of lakhs of informal workers and migrant labourers in the country shows the challenges of survival they are facing at this hour.

To address some of these challenges, a Rs 1.7 lakh crore relief package has been announced by the Finance Minister on the 26th of March, and it is envisioned to provide some amount of support to the poor. Subsequently, on the following day, the RBI Governor has also announced a series of monetary policy measures to help the economy, which is facing such a serious health and economic crisis. In particular, it has taken a decision to cut repo rate by 75 basis points and reverse repo by 90 basis points. A moratorium of 3 months of EMIs on all outstanding loans is also announced. Additionally, there are also a number of measures to improve liquidity. All these policies, undoubtedly, are in the right direction. However, banks need to respond to these monetary policy changes quickly by making necessary changes at the bank level. Further, going forward, these changes in monetary policies may not be sufficient to adequately address the massive challenges that we are facing today. For example, if after 3 months of moratorium one needs to pay his/her EMI with accumulated interest burden, we may see many defaults. The considerably large fiscal expenses that we would see in the days to come also need to be financed. Thus, these measures that have been introduced today are only a first step. As the situation unfolds, we would need frequent assessment and appropriate intervention from the two major institutions viz, the Ministry of Finance and the RBI for addressing the challenges we are facing at this hour.

2. Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings

The covid-19 pandemic has truly been a game-changer across the development spectrum in terms of the hit to the global economy, domestic economies and several segments and sectors of the domestic economy. The UNCTAD estimated a $1 trillion hit to the global economy. There have also been extremely disconcerting parallels drawn with the global financial meltdown of October 2008 and even the Great Depression of 1929.

In the case of India, the economy has been in the midst of a marked macro-economic slowdown with the impact being pronounced on MSMEs, the unorganized sector, exports, and manufacturing. This global crisis is estimated by the UNCTAD to set back the Indian economy by $348 Million because of the devastation to not just firms but also industries across the development spectrum, e.g., airlines, road and rail transport, automobiles, hospitality, meat and poultry, films, music, sports, advertising, media, retailers, tourism, etc. and supply chain disruptions. There has also been a bloodbath on the bourses.

There is a compelling case for massive intervention by all stake-holders and extending the reach of the state, particularly when there is little risk of spiraling inflation in these straitened times.

There is the debilitating impact on the GDP growth for Q4 19–20 and FY 20–21, weakening of aggregate demand and uncertain and negative future outlook. The RBI acted decisively by reducing the Repo rate by 75 bps to 4.4 % and reducing the Reverse Repo by 90 bps to 4 %, three-month moratorium on payment of installments of Term Loan outstanding and deferment of interest on WC facilities by 3 months. This deferment will not be considered for computation of NPAs and revised DP calculations will be done by reassessing the credit history of the borrower.

The CRR has been slashed by 100 bps to 3 % to release 1.37 lakh crores to the banking system. The requirement of minimum daily CRR balance has been reduced from 90 %— 80 % till June 30, 2020. Thus, liquidity of Rs, 3.74 lakh crore has been injected into the system. The total liquidity injection works out to 3.4 % of GDP.

These measures are of considerable contextual significance not just for leveraged sectors and companies but also for the larger macro-economy. What makes this set of measures is that historically, the RBI has been known for taking gradual, calibrated measures. But this time, by going the whole hog, thereby redeeming its promise to “do whatever it takes”, the RBI is ahead of the curve. There would now be a renewed thrust on banks to ensure the much greater transmission of the rate cuts than in the past. Further, banks need to prudent; otherwise, at the end of the three-month moratorium, there could be a surge in NPAs.

This combination of moratoriums, liquidity enhancing measures and the steep repo rate cut would prevent a freeze in credit/debt market as also a crisis of confidence. Hence, the Governor took the right call in these difficult Coronavirus times.

3. R.K Anand, Ex Member, IBA Monetary Group and Former Chief Economist, PNB

Key points: MPC’s response to the current and evolving macroeconomic situation and their likely impact upon the real economy and financial markets

Response	Likely Impact
Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 75 basis points to 4.40 per cent from 5.15 per cent with immediate effect.	Gauging the emerging recessionary forces front loading of interest rate cut is aimed at bringing down cost of borrowed funds as well as swift transmission thereof via Repo-Retail Loan Interest Linkage.
Widened the LAF corridor from 25 bps to 40 bps, the reverse repo rate under the LAF stands reduced thus by 90 basis points to 4.0 per cent.	Strong disincentive and higher negative carry for ideally placing the surplus liquidity in Reverse Repo
Medium-term target for inflation (CPI) maintained 4 per cent within a band of +/- 2 per cent, while supporting growth.	Outcome of Falling Fuel & Food prices due to fall in global crude prices, likely fall in consumption demand due to Covid-19 income pull down and expected Rabi crop supply, vegetables and fruits.
Reduce the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent from 5.40 per cent;	Will have the impact of fast flowing source of liquidity for those lenders who need more.
Continue with accommodative stance for targeting revival of growth and mitigation of likely loss out of COVID-19.	Risk mitigation against Black Swan Covid-19 and continuance of theme of funding economic growth.
100 bps reduction in CRR and reduction in Daily CRR Limit from 90% to 80%	Structural boost to durable liquidity & profitability by freeing Rs.1.37 trn for lending & investment. Ease in daily compliance of CRR.

Going forward-Implications:

• The uncertainty i.e. risk aversion among the investors, entrepreneurs and lenders may continue for some more time vis-a-vis intensity of pull down by Covid-19.
• All other emerging developments dampen inflationary expectations rather indicate strong bias towards recession in coming two-three quarters. Deceleration in income, output & employment are thus expected outcome.
• Re-emergence out of the recession depends upon the intensity of virus spread which is unknown presently.
• All the sectors of economy may face pull down yet the Farm Sector is likely to remain comparatively less impacted.
• Movement of yields may remain upward caused on fixed income securities.
• Currencies may undergo dynamics of uncertainty wherein $ USD may look like safe heaven facilitating inflow of investible funds from EMs.
• Commodities may remain in recessionary trajectory due to slide in global growth
• Crude prices are likely to hover around present mark with less upward headroom.
• Stock market sell-off may taper off vis a vis control on spread of virus.
• Balance of Payment may remain balanced or low imbalance due to low import bill.
• Forex Reserves presently $487bn will support stability in future economic outlook.

Hit the Bull’s-eye: Oxygen & ventilators are life-savers for those affected by the unknown virus attack. Affordable Liquidity, Monetary Transmission, Credit-flow and Realignment of Debt Servicing with the projected drag cash flows becomes critical for the economy to pass through lockdowns and consequent fall in income, output & employment. In case of India, strict vigil and swift action to control spread of virus and front loading of Fiscal Measures may comparatively better address the critical needs of economic agents. Yet some fallout of global pandemic can’t be ruled out i.e. displacement of daily wage earners and contract workers. However, the bigger issue seems addressed with:

• ‘Triple L’ i.e. Rs.3.74 trillion Liquidity injection (CRR cut, TLTRO and Relaxation in MSF) creates enough liquidity as well as capacity to extend credit by the lenders. Durable Liquidity creates positive outlook for the Investors and Rating Cos vis-a-vis unknown intensity, spread and duration of Covid-19.
• This treatment is expected of financial engineers to deal with ‘rarest of rare’ ‘Black Swan’ events e.g. Covid-19. Also, make us believe ‘Even This Shall Pass’.
• While the current fiscal and monetary actions may ease the present situation. Going forward, more fiscal and monetary measures may come if need be matching with the intensity of impact of virus breakout. Right now, control and coordination to prevent health risk from turning into economic risk will make us lead in paving the path of coming out of current dark event.

4. M.P Bezbaruah , Professor & Coordinator SAP, Department of Economics, Gauhati University

RBI's initiatives are obviously in the right direction. Only issue for discussion is if the measures are enough or too little or too much.