The RBI has recently cut interest rates and injected liquidity into the market but with the coming disinflation, it needs to cut interest rates much more.
The coronavirus-led economic crisis is unprecedented and the government needs to weigh the risk arising from not taking stimulus measures more than the cost of such stimulus. While the government and the Reserve Bank of India have already rolled out various economic packages, they should further cut interest rates, increase liquidity, and allow the fiscal deficit to widen as a response to the coronavirus pandemic, Jahangir Aziz, chief emerging markets economist, JP Morgan, wrote in The Indian Express today. The RBI has recently cut interest rates and injected liquidity into the market but with the coming disinflation, it needs to cut interest rates much more, Jahangir Aziz added.
He further said that apart from keeping markets flush with liquidity and low-interest rates, the RBI also needs to prevent the bond yields from surging due to the large increase in the deficit. Indicating towards the pessimistic medium-term growth forecasts, the economist suggested that the government should provide adequate income support to the households so that the recovery is not restricted by impaired balance sheets. He also pointed out that compensating the decline in private demand by increasing public spending may not work in the present conditions.
Given the recent downgrade in India’s ratings and a poor medium-term growth outlook, Jahangir Aziz warned that the bad debt may rise and the banks may cut back credit due to the fear of worsening credit quality. In order to prevent this situation, the RBI needs to increase tolerance on accounting norms, provisioning rules, and even capital requirements, he added.
Under the Modi’s Atma Nirbhar Bharat package, Finance Minister Nirmala Sitharaman announced lakhs of crores of bank guarantees for easy credit to the small and medium industries. However, Jahangir Aziz highlighted that alike the US Fed and the ECB, the RBI should provide liquidity directly to corporates, instead of through banks supported by the government guarantees.