RBI Governor Das Fires Second Salvo On Liquidity, Rate Cuts, Never Mind MPC 

In his second round of monetary and regulatory measures intended to alleviate the financial stress caused by the Covid-19 pandemic, Reserve Bank of India (RBI) Governor Shaktikanta Das used Mario Draghi’s famous phrase of 2012: “whatever it takes”. The former president of the European Central Bank (ECB) said at a meeting in London eight years ago that the bank would do “whatever it takes to preserve the euro”.

Since then, many central bankers and government heads have used the same phrase, and today (17 April) Shaktikanta Das did the same. Doing “whatever it takes” means reducing rates whenever needed, easing regulatory measures to enable repayments moratoriums to stressed sectors, and providing liquidity till it hurts.

The RBI’s whisper to banks on 27 March, to go out and lend, came with a push and a louder message: don’t let your money remain idle. Lend till it hurts.

The key measures announced by Das in a televised address included the following:

• A Rs 50,000 crore targeted long-term repo operation to banks that has to be used to buy investment grade bonds of small and mid-sized non-bank financial companies (NBFCs) and microfinance institutions.
• Another Rs 50,000 crore is to be given as refinance to three all-India lending institutions like Nabard (Rs 25,000 crore), National Housing Bank (Rs 10,000 crore) and Sidbi (Rs 15,000). This will allow these institutions, which lend to rural banks, housing finance companies and small businesses, to raise money cheaply at a time when the markets are not able to generate that kind of resources. This refinance will be available at 4.4 per cent — which allows them to onlend the money at a low rate.
• The fixed-term repo rate of 4 per cent has been cut to 3.75 per cent, which means banks can no longer park idle money and earn 4 per cent without much effort. They are being prodded to lend and not become lazy in growing their assets. One should expect them to cut deposit and lending rates as a result of this prod.
• States are being given more leeway to borrow short-term funds through their ways and means accounts with the RBI, with the limit now being raised by 60 per cent from outstandings as at the end of March 2020. This will enable them to meet rising demands on their resources for healthcare and provide relief to the poor and small businesses.
• Banks, which now face slippages in their loan accounts, have been given a breather. In his last address on 27 March, Governor Das said that loans to borrowers which were regular (ie, not in default) as on 1 March would be given a three-month moratorium on interest payments. Das has now said that banks need not classify these loans as bad for 180 days — and not just 90 days — as long as they provide 10 per cent of these amounts as provisions. This means any loans becoming bad will be classified as good until 1 September. The actual bad loans situation will be known only when the second quarter results are announced in October 2020.
• To enable banks to retain capital, they have been barred from making any further dividends after 31 March 2020 for six months. Their liquidity coverage ratio (LCR) has also been eased to 80 per cent (currently they need liquidity coverage of 100 per cent of needs), and the old level of 100 per cent will have to be achieved in two stages, to 90 per cent and 100 per cent by 1 October 2020 and 1 April 2021. The LCR is the amount banks must hold in easily encashable securities that can be converted to cash to meet any unexpected crisis in the short term, usually 30 days.
• As a result of these measures, one can expect banks to cut deposit rates since they will earn less from reverse repo rates. They may also reduce lending rates. The State Bank of India last week reduced savings bank rates to 2.75 per cent, which is 1 per cent below the new reverse repo rate.

The Governor also announced that inflation was on a downward trajectory, and that he expected to see a further downtrend in the coming months.

This is unusual, for assessments and forward-looking statements on inflation and rates are in the remit of the Monetary Policy Committee (MPC). The Governor paid routine obeisance to the MPC, but made his statement on the inflation trajectory anyway.

Given the massive economic crisis precipitated by the pandemic, the RBI has already taken charge of interest rates, by cutting the fixed reverse repo rate without the MPC recommending it, and by reducing cash reserve ratio (CRR) on 27 March.

The MPC is practically irrelevant now. Leadership in monetary policy is now being taken by the RBI Governor.

Governor Das has proved that ultimately it is the central bank that has all the necessary weaponry to deal with a crisis, “whatever it takes”. The MPC is now a mere talk shop. It does not have “what it takes” to deal with crises.

It’s comforting to know the Governor Das is now in charge, and not the bumbling MPC.