RBI And MPC Should Junk Monetary Policy Calendar In Times Of Covid-19, Act Preemptively To Avert Crisis

As we gradually move towards a graded exit from the lockdown, there are calls for an extension of the moratorium by another three months.

The rationale for another moratorium is that it will give companies (and individuals) an extended window to restore their balance sheets (savings).

Not all companies or individuals may want to avail this window. However, the opportunity will give them a choice which can help provide some support in the post -lockdown phase as economic activity normalises.

However, what’s more important is the discussion around the repo rates (and the reverse repo rates), especially as the next Monetary Policy Committee is due in the first week of June.

Indeed, one expects the Reserve Bank of India (RBI) to be bold in terms of announcing deeper rate cuts, but more importantly, announcements of sizeable interventions in providing support to the corporate bond market and assisting states in borrowing without an undue increase in costs.

As the government increases its borrowings, many expect the cost of borrowing to go up. However, proactive intervention by the RBI can ensure that yields remain well within the government’s comfort zone.

The problem is not what the RBI will or will not do, but it is more to do with the timing.

The Governor had already cut reverse repo rates — the rate at which banks lend to the RBI — in an attempt to get banks to lend to borrowers.

This announcement came outside the MPC meeting and it raised significant eyebrows as many felt that the move undermined the monetary policy framework.

However, the question in front of us is whether we need to follow a prescribed monetary policy calendar during a crisis of the current magnitude.

This is important as world over, central banks have acted irrespective of their calendar.

The move to fine-tune policy on the go is important as the crisis requires fine-tuning as new information comes to light.

The fundamental objective at such times should not be of price stability but instead, be of ensuring financial market stability.

That is, the central bank must act to avoid the economic crisis to spill over to our already stressed financial and banking sector.

To prevent this contagion, the central bank should act pre-emptively and be seen as a one that instils confidence in a risk-averse banking system.

In contrast, so far, the RBI itself has been exceedingly risk averse.

There are reasons for the RBI and the MPC to suspend the calendar and make announcements more frequently, including those on rate cuts (especially the repo rates).

There have been times when the Governor and the RBI have been bold over the last couple of months, but there have also been times when their response has been timid.

There is a need for the Governor to come out and give confidence to the markets that it is willing to do whatever it takes.

The best way to back the statement would be to act boldly and address all concerns of market participants, especially of those that participate in markets that are increasingly becoming illiquid.