The best way to handle a crisis is to first admit there's one. That confession has come from the RBI.
In an unscheduled address on Wednesday morning, Governor Shaktikanta Das indicated that because the fresh crisis (read Covid-19) was still unfolding, both its recent growth and inflation projections are in for a toss.
While the inflation trajectory for FY22 will now depend squarely on Covid-19 infections and the impact of localised lockdowns, the economic outlook was 'highly uncertain and clouded with downside risks,' he concluded.
Just last month, the central bank projected inflation for Q1 and Q2 at 5.2%, while FY22 growth was retained at 10.5%. Economists are used to analysing things ceteris paribus, where 'all other things being unchanged or constant,' but the coronavirus pandemic has made forecasting nearly impossible.
But citing RBI's battle readiness during such unforeseen conditions, Das, like last year, unloaded monetary tools to minimize the incoming onslaught on the financial system. First up, he announced Rs 50,000 crore liquidity support to banks and financial institutions including vaccine makers and urged banks to create a Covid-19 loan book.
RBI will incentivize banks to park their surpluses under an attractive reverse repo rate. Above all, reaching out to small businesses and MSMEs in their moment of need, he opened up fresh credit lines, besides allowing a one-time restructuring plan for already restructured loans, while new borrowers are given an option to pursue restructuring.
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The measures sent benchmark indices soaring with the 30-share BSE and Nifty jumping about 0.5% in early morning trade.
Borrowers with restructured loans having an aggregate exposure of up to Rs 25 crore will be entitled for a further 2-year moratorium period. Banks can also pursue one-time restructuring of retail borrowers, small businesses and MSMEs accounts, but bankers request for extension of classifying bad loans, compelling the need for higher provisioning and denting banks' bottomlines, fell on deaf ears.
The proposed on-tap liquidity window of Rs 50,000 crore with tenors of up to three years at 4% will be available till March, 2022 and banks can provide fresh lending to a wide range of entities including vaccine manufactures, importers suppliers of vaccines, hospitals, dispensaries and others. These loans will continue to be classified under priority sector till repayment or maturity, whichever is earlier.
Banks are expected to create a Covid-19 loan book under the scheme and as an additional incentive, banks can park their surpluses up to the size of the Covid loan book with the RBI at 40 bps higher than the reverse repo rate.
To support small busineses, micro and small industries, RBI will conduct a special 3-year long-term repo operation of Rs 10,000 crore for small finance banks, who can lend up to Rs 10 lakh per borrower. This will be valid till October, 2021.
As for growth, Das sounded optimistic that the drag on the economy could be moderate than last year, even though the slump comes just when 'India was at the foothills of a strong recovery.'
"The dent to aggregate demand is expected to be moderate in comparison to a year ago," he reasoned citing data until March quarter when economic activity was moving north and Covid-19 infections going south. But as we see, it was starting April that hell broke loose and so Das believes aggregate demand conditions, particularly in contact-intensive services, may see a temporary dip, depending on how the Covid situation unfolds.
Aggregate supply conditions are underpinned by the resilience of the agricultural sector and going forward, a normal south-west monsoon will help contain food price pressures, though the build-up in input price pressures across sectors, driven in part by elevated global commodity prices, remains a conern.