One wishes Reserve Bank of India (RBI) Governor Shaktikanta Das an simpler third year on Mint Street. It has been a rough time for the economy, as it has been for the economic markets, but Das has taken the challenges in his stride, juggling a number of objectives skilfully. When he took more than as Governor in December 2018, the funds markets have been all but roiled by the collapse of IL&FS, which triggered a liquidity shock amidst fears of more defaults and achievable insolvencies at NBFCs. Given NBFCs had been big intermediaries—accounting for almost a third of the incremental credit development in the 3 years to 2017-18—and provided the massive asset-liability mismatches on their books, the issues have been justified, in particular considering that they had borrowed massive sums from mutual funds.
The shortage of liquidity, resulting partly from increasing crude oil costs and the deteriorating BoP position, had spooked the bond markets. Risk aversion was operating higher. It was in this attempting atmosphere that Das reduce his teeth as a central banker, and he managed to calm the markets devoid of providing in to unreasonable demands by mutual funds or true estate players. A couple of months into his innings, Das sought to reverse the price cycle bringing down the price of funds, trimming the repo by 25 bps in February 2019. While the transmission into decrease lending prices by banks could not have totally matched the 225 basis points reduce in the repo that Das has produced so far, there is no denying more affordable funds has helped borrowers.
It is the liquidity management, having said that, for which the Governor ought to be complimented. While the surge in deposits, as also the massive portfolio flows, have helped liquidity in the final six months, Das did come up with a number of unconventional measures early on in the pandemic to make sure funds was plentiful and was accessible to banks at a low price so that they could lend the funds at reasonably priced prices.
This was no doubt, substantially in maintaining with what his central bank peers about the globe have been performing, permitting funds to slosh about in the hope it will increase consumption. Banks could not have employed the lines of credit, but complete marks to the central bank for the provides. Moreover, he has helped borrowers by permitting banks to give them a six-month moratorium on loan repayments and also banks by providing them forbearance on the classification of loans.
One could argue there is excessive liquidity in the method today and that, despite the fact that inflation has been trending up to uncomfortable levels—the CPI remained higher at 6.93% in November—RBI has not however began soaking it up. That is for the reason that the government’s huge borrowing programme—some Rs 12 lakh crore—needs to go by means of, and the states also have to have to be in a position to raise sources at reasonably priced prices. Until that is completed, the bond markets have to have to be kept in excellent humour.
It is vital the governments—states and the Centre—are in a position to borrow at a time when banks are hesitant to lend. Indeed, Das’s pro-development stance is to be applauded he appreciates the recovery is fragile and not broad-primarily based. Any other Governor would have pulled the plug on liquidity. To be positive, we would quickly leave this effortless funds atmosphere behind, but going by Das’s track record, the exit ought to not be also challenging.