ALL EYES ON RBI

With all the celebration and frenzy of the day over, we are back to gazing at the wall. What next?

While we continue to top world charts in terms of Covid deaths and infection rate, taking that dubious distinction now as a part of life, the price to pay for a huge population living in haphazard and unplanned cities, the ‘event’ to look forward to is the MPC meet tomorrow.

A 25 bps rate cut might not change anything in our lives but psychologically it will mean that at least someone has your back. Bloomberg did a quick survey of 44 economists of which 50% or 22 of them expect a 25 bps rate cut tomorrow with only one expecting a 50 bps cut. The balance 21, which is almost 50%, expect a status quo. 

A quick thought – interest rates are already at a 20-year low and no one is buying and the banks are also reluctant to lend, so, will a further rate cut really help?

This time around, all eyes and ears will be on what the Governor does about the moratorium. Most bankers, rightly so, do not want an extension and in all likelihood, it will not be extended too as slowly but surely, in bits and spurts, the factories are working. If the RBI doesn’t extend the moratorium, then, the 25 bps rate cut will go a long way in shoring up the moods. Given the speed at which banks transmit rate cuts, we could see the benefit of these cuts in the next 10-12 months.

RBI’s main objective is to keep a watch On inflation and not growth. But the Governor did say in the March meet that RBI will do whatever it takes to protect growth from the pandemic impact. The RBI now has to focus on growth as well as inflation, while ensuring the health of the banks remains intact, who are bracing themselves for a deluge of NPAs.

In a scenario where CPI is spiking up, cutting rates further to boost growth will only spike up the inflation further. Also, the divergent inflation rates – CPI is going up while WPI is in the negative zone is worrisome. This means consumers are paying a higher price while producers have no pricing power. Thus the rate cut path is a tricky one in this situation.

More than rate cut, economists want the RBI to boost growth and bring stability through unconventional methods. Definitely not printing money or QE, but many are talking about a one-time restructuring of loans for the most stressed sectors like airlines, hospitality, realty. Like the moratorium, this is not a good move for the banks but a mere delaying tactic; maybe under these extraordinary circumstances, that’s what we need to do – delay a complete collapse because once there is a bounce back, other issues brushed under the carpet can be cleaned out.

Well, RBI has a tricky path to tread and the Govt remains busy in beating up a nationalism and religious fervor while the common man on the street remains a mute spectator, getting eaten up either by the burden of living or the virus. Jai Shri Ram!