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Thirteenth EGROW Shadow Monetary Policy Committee Meet held on December 1, 2020


Recording of the event

Key Takeaways

  1. There is high consumer inflation which is expected to look upwards. SS side issues could play a role too in addition to abundant liquidity.
  2. There is stress in labor market -Urban women, youth, and educated people are most unemployed.
  3. Banks must seek to expand credit by offering lower rates.
  4. The repo rate at 4% is at its lowest. There may be resistance in scaling it further down.
  5. The stress on corporate world could reflect on balance sheet of commercial banks. NPAs are expected to rise to nearly 15%
  6. The sanction of credit in MSME is much higher than disbursement.

Recommendation of EGROW Shadow MPC

Recommendation of the EGROW Shadow MPC Members

Immediate - All - Pause

In February 2021-
2 Members - 50 bp reduction
3 Members – Pause

Guest Members

Immediate - Pause
Later - Pause

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Arvind Virmani, Chairman EGROW Foundation

Q2 GDP data shows that recovery of private consumption is lagging. This is primarily due fears of contagion in use of contact service, concentrated in sub aggregate “trade, hotels, restaurants, transport, communications & broadcasting,”. Products used in these services like beverages, or associated with their usage like apparel, textiles & misc manufactures are also affected. Other services like entertainment & hospitality (marriages, parties) which are part of the sub-aggregate, “administration, defense and there services. RBI credit policy and Govt guarantees and tax concessions, will have to focus a little more on these sectors to ensure survival of viable firms.

The unemployment rate normalized in July-August and has lower in Sept-Oct than in the same period last year. The LAFPR rate is however, 2% points (5%) lower than a year ago. Detailed data suggest that most of this is due to voluntary withdrawal from labor market by urban women and highly educated persons, and delayed entry of youth (20-24) into the labor market. Lower LFPAR among the uneducated is, however, likely due to lack of jobs in the service sectors badly affected by fears of contagion. I expect positive GDP growth in H2 of FY21, with full year FY21 GDP within by my original (may) forecast range of 5% -/+ 2.5%, with a downward bias(since august).

The unprecedented rise in the ratio of CPI for food relative to WPI for food was suggestive of supply chain disruptions and rise in logistics costs, complemented by seasonal rise in vegetable prices. A rise in prices of eggs and chicken, seems to be due to an unanticipated spike in demand from rural areas, with pandemic logistics disruptions, slowing the delivery of products to areas with increased demand. Unseasonal rains have also disrupted some agricultural items. Rise in edible oil prices has already been addressed by a reduction in import duties. The new factors have delayed a return of CPI inflation below 6%, but are still expected to do so by year-end. State governments need to focus more than they have historically, in ensuring that supply chains originating in, traversing or ending in their States are functioning smoothly.

The pause in repo rate with soft forward guidance, introduced at the last MPC meeting is expected to be continued in the December 4, MPC meeting.

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

We are looking at a pause in this policy announcement. Post inflation coming down we can have 50 bps rate cut in February. GDP contraction can be around 6.5%. Rebound rate can be at 9% depending on availability of vaccine early in next FY otherwise it could be around 5%. Core CPI is around 4% and Core WPI is around 1%. MCLR is linked to repo rate so liquidity alone won’t solve the problem. RBI should come out or indicate an OMO calendar. OMO calendar could actually help banks in buying. Industry are not cash rich at this time. 5% credit growth include SME offtake under credit guarantee scheme

3. Ms. Upasna Bhardwaj, Senior Vice President, Kotak Mahindra Bank

The challenge before the MPC is surmounting as inflation has remained above the upper tolerance band for over 3 quarters. While growth trajectory seems to be in a mend but recovery remains extremely fragile. However, at this point I do not expect further rate cuts to aid growth or demand. While few sectors are recovering there is a need to focus in a targeted manner on other weaklings through specific focused measures rather than any further umbrella rate cuts. I expect the liquidity conditions to remain benign atleast through next six months. However a slight upturn in activity poses significant upside risk to core inflation thereby raising probability of a liquidity withdrawal actions sooner than anticipated. I’d continue to closely monitor the inflation trends in months ahead. I expect and recommend a pause in rates in the foreseeable future.

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

On credit growth ratio we are seeing a lot of prepayment by large companies, which ties into your contention. There must be a prolonged rate pause in coming bi-monthly policy statement. Under open market operation we should be very careful. The USD is going in for secular decline, it corelates that emerging market can gain from this situation. Underestimate of demand was really in rural areas. House pricing, house purchased and housing loan provided in last 3-4 months has been out of charts. We can also see there is a coming back of demand in construction.

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

The growth results of Q2 are encouraging, and many institutions have started revising the projections upwards for India. The inflationary pressures could build up, not just because of building liquidity in the economy, but because of supply side constraints, especially from shocks in agro sector.

The credit offtake is improving. The positive signs in the economy are reflected in improving GST, sales of vehicles, volumes of UPI transactions, etc. However, the strain in the economy due to Covid Pandemic, could reflect in higher NPAs in banking sector.

The Repo Rate at 4 percent is historically lowest, and reducing it further may not be easy at this stage, given fear of north-bound inflation. To boost credit, Reverse Repo can be reduced further from the level of 3.35 percent, prevalent now. To ensure flow of credit to MSMEs, subvention schemes could be considered.

Guest Panelist from ASSOCHAM

1. Raman Aggarwal, Co-Chairman, Finance Industry Development Council (FIDC)

Credit Growth: There is a substantial gap between the amount sanctioned under the ECLG Scheme for MSMEs and the amount actually disbursed by banks and NBFCs. This is because MSMEs are playing safe. While they are getting the loans sanctioned but holding back the disbursement, due to the uncertainty relating to COVID.

Liquidity for NBFCs: On one hand we have surplus liquidity, especially, for the highly rated large NBFCs, but a large number of small and medium ones continue to face liquidity challenges. In October, RBI announced On Tap TLTRO scheme for banks which for the first time included term loans and did not prescribe any minimum level of credit rating when it comes to bank lending. However, the list of eligible sectors to whom banks can lend under this scheme, does not include NBFCs. As an immediate step, RBI must allow banks to lend to NBFCs also under the On Tap TLTRO, for on lending to the targeted sectors. Further, a special carve out for small and medium NBFCs will address their liquidity concerns.

Strengthening of Regulation of NBFCs: The Internal Working Group of RBI on Banking Licenses, has recommended that NBFCs with asset base of 50,000 crs. It is very important that while regulation of large NBFCs is brought at par with banks, some of the benefits that banks currently enjoy and NBFCs don't, are also given. This should be an automatic process. Classic example is that when NPA norms for NBFCs were brought at par with banks by RBI in 2015, NBFCs had to still lobby hard before the Govt to get coverage under the SARFAESI Act. Similarly, it took more than 3 years to get some of the tax benefits that banks enjoyed but NBFCs didn't. As a system, such parity must be a holistic process and not piecemeal.

2. Shri S. C. Aggarwal, Senior Member, ASSOCHAM & CMD, SMC Group

Pandemic has continued the pressure on supply side, causing the inflation to stay at levels higher than initial estimates. It thus remains unlikely that RBI will cut the rates further. Nonetheless, liquidity position in the money market remains comfortable with funds available at competitive rates. However, investor confidence continues to remain low.