The government has provided 1.7 trillion rupees to help the poor and marginalized sections of society. Most experts have called it the first tranche of government bailouts and expect the Reserve Bank of India (RBI) to continue it with lower interest rates in addition to announcing other liquidity support measures.
While the RBI’s Monetary Policy Committee (MPC) was originally scheduled to meet in the first week of April, the central bank today held a briefing in a surprise decision. Here’s what the major brokerage firms expect from the central bank.
In keeping with the Governor of the RBI’s promise that the RBI will do whatever it takes, it is reasonable to expect a sharp reduction in borrowing costs. We expect the RBI to continue its liquidity infusion tools such as open market operations (OMO), forex swaps and long-term refinancing options (LTRO), but also to announce measures to support businesses suffering from business losses due to the pandemic.
Since the current downturn will have a significant impact on the financial health of many sectors, we expect the RBI to introduce forbearance measures from the most affected or stressed sectors, and extend the repayment schedule and moratorium, as well as the implementation of other measures, to avoid large NPAs and reduce risk weights. We expect the RBI to continue its actions and its accommodative monetary policy stance; and reduce the repo rate by 50 basis points.
We believe that the RBI runs the risk of falling behind in terms of proactive political intervention, particularly with the magnitude of the shocks currently hitting the Indian economy and the financial system. So far, the measures have been to increase domestic and dollar liquidity to ease financial conditions.
At the very least, we expect the RBI to provide a 50bp drop in repo rate and a minimum 65bp easing in Q2, bringing the repo rate to 4.50%. In addition, we expect the RBI to significantly accelerate its market intervention through purchases of open market operations (OMO) and unconventional tools such as long-term repo transactions (LTRO).
Such emergency situations may also encourage it to extend the scope of its asset purchase program to take into account corporate bonds and other non-gold securities, by directly taking credit risk on its balance sheet or by structuring a special purpose vehicle in collaboration with the government.
It can also choose to deploy tools such as adjusting the risk weights of banks to various sectors or reducing countercyclical capital buffers. Relaxing PMA standards for MSMEs or extending loan repayment windows for them and households can also be seen as a cushion against a potentially massive accumulation of bad debts.
As growth and inflation are revised downward globally, there is also room for policy easing for India. Disinflationary forces should reassure MPCs that inflation is expected to fall below the 4% RBI target in the coming months. Our economist expects a drop of 25 to 40 basis points, with risks biased towards the upper end of the range.
As fiscal space opens up due to the sharp drop in crude oil prices, the government should allow some repercussions on consumers given the current grim scenario due to COVID-19. In addition, spending pressures will increase to strengthen health systems to cope with the epidemic and deliver targeted intervention to cushion the ensuing economic shock. Budgeted tax revenue targets are also under pressure due to the growth induced by COVIDs.
The government has announced an economic support plan to deal with the national foreclosure situation. It seems weak, all the more so since part (around a third) seems to be a re-use of the existing allocation of funds. In addition, part includes an additional contribution to long-term pension funds. No official announcement, but FM has hinted that more may be considered in the future. Otherwise, the current package is disappointing.