RBI hasn’t exhausted its ammunition in COVID war, says Shaktikanta Das

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August 28, 2020 7:45 AM

Das stressed on the importance of unwinding Covid-specific regulatory dispensations in a timely fashion so that the system does not relapse into the old practice of making forbearance the norm. He said the steps taken by the RBI in the form of rate cuts and liquidity infusion, among others, are having their desired impact and it is still playing out.

The governor said the recent hardening in bond yields should not be construed as a sign that the central bank’s stimulus measures have been ineffective.

The Reserve Bank of India (RBI) has not exhausted its policy options by front-loading repo rate cuts and it continues to have enough instruments to battle the challenges brought upon by Covid-19, governor Shaktikanta Das said on Thursday. At the same time, Das reiterated the importance of winding down the regulatory forbearance being offered in view of the pandemic as soon as its effect starts to wane.

“The first thing I would like to say is that we have not exhausted our policy options, whether it relates to the rate cut or whether it relates to any other aspect of central banking. We have not exhausted our instruments or ammunition,” Das said, adding, “What the MPC (monetary policy committee) resolution says and what I have said in my MPC minutes and what the other members of the MPC have also said is that the decision of the MPC was to keep the gunpowder dry.” He was speaking at Unlock BFSI, an event organised by Business Standard.

Following the governor’s statement, the yield on the 10-year benchmark fell to an intra-day low of 6.123% and closed at 6.153%, down nearly four basis points (bps) from the previous close. This marks the steepest slide in the yield since August 4, days before the MPC hit pause on rates. The August 6 policy decision and the subsequent release of the minutes of the MPC meeting had sent jitters through the bond markets. Thursday’s commentary may have eased some nerves.

The governor said the recent hardening in bond yields should not be construed as a sign that the central bank’s stimulus measures have been ineffective. “It’s only in the last fortnight that bond yields have hardened. So, it is not correct to say that RBI policy rate cuts have not worked,” Das said. He said the steps taken by the RBI in the form of rate cuts and liquidity infusion, among others, are having their desired impact and it is still playing out. “As RBI, our responsibility is to ensure that the financial market, whether it is the bond market or the currency market, they function in an efficient manner. We are extremely watchful and as and when the situation warrants or as and when we anticipate emerging situations, we will deal with it,” he said.

Das stressed on the importance of unwinding Covid-specific regulatory dispensations in a timely fashion so that the system does not relapse into the old practice of making forbearance the norm. “Post containment of Covid-19, I repeat, post containment of Covid, a very careful trajectory needs to be followed for orderly unwinding of the various counter-cyclical measures taken by the RBI and the financial sector should return to normal functioning without relying on the regulatory relaxations and other measures as the new norm,” he said.

In a post-Covid world, banks must look deeply within and reorient themselves, Das said. The causes of weak banks can usually be traced to one or more of the following conditions: An inappropriate business model given the business environment; quality or the lack of governance and decision making; misalignment of internal incentive structures with external shareholder/stakeholder interests and other factors. “Accordingly, the core of resilient banks is made up of good governance, effective risk management and robust internal controls. This is not to say that Indian banks do not have sound governance and risk management systems in place. There is always scope for improvement and these are the areas which need greater attention going forward,” he added.

Banks also need to look out for ‘sunrise’ sectors while supporting those which have the potential to bounce back. Das cited the example of prospective business opportunities in the rural sector, which remain unexplored despite efforts to support it. “They need to look at start-ups, renewables, logistics, value chains and other such potential areas. The banking sector has a responsible role to play not only as a facilitator of growth of the economy but also to earn its own bread,” the governor said. Thus, a complete re-look at the business strategy and orientation is the immediate need of the hour.

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