Winding down liquidity after the recovery is broad-based will require the skills Das has shown in abundance so far
Speaking at the event, NCAER Director General Shekhar Shah said the pandemic has driven digitalisation in a few months that would have otherwise required years.
One wishes Reserve Bank of India (RBI) Governor Shaktikanta Das an easier third year on Mint Street. It has been a rough time for the economy, as it has been for the financial markets, but Das has taken the challenges in his stride, juggling multiple objectives skilfully. When he took over as Governor in December 2018, the money markets were all but roiled by the collapse of IL&FS, which triggered a liquidity shock amidst fears of more defaults and possible insolvencies at NBFCs. Given NBFCs had been major intermediaries—accounting for nearly a third of the incremental credit growth in the three years to 2017-18—and given the large asset-liability mismatches on their books, the concerns were justified, especially since they had borrowed large sums from mutual funds.
The shortage of liquidity, resulting partly from rising crude oil prices and the deteriorating BoP position, had spooked the bond markets. Risk aversion was running high. It was in this trying environment that Das cut his teeth as a central banker, and he managed to calm the markets without giving in to unreasonable demands by mutual funds or real estate players. A couple of months into his innings, Das sought to reverse the rate cycle bringing down the cost of money, trimming the repo by 25 bps in February 2019. While the transmission into lower lending rates by banks may not have entirely matched the 225 basis points cut in the repo that Das has made so far, there is no denying cheaper money has helped borrowers.
It is the liquidity management, however, for which the Governor should be complimented. While the surge in deposits, as also the large portfolio flows, have helped liquidity in the last six months, Das did come up with several unconventional measures early on in the pandemic to ensure money was plentiful and was available to banks at a low cost so that they could lend the money at affordable rates.
This was no doubt, much in keeping with what his central bank peers around the globe have been doing, allowing money to slosh around in the hope it will boost consumption. Banks may not have used the lines of credit, but full marks to the central bank for the offers. Moreover, he has helped borrowers by allowing banks to offer them a six-month moratorium on loan repayments and also banks by giving them forbearance on the classification of loans.
One could argue there is excessive liquidity in the system today and that, although inflation has been trending up to uncomfortable levels—the CPI remained high at 6.93% in November—RBI has not yet started soaking it up. That is because the government’s massive borrowing programme—some Rs 12 lakh crore—needs to go through, and the states too need to be able to raise resources at affordable rates. Until that is completed, the bond markets need to be kept in good humour.
It is important the governments—states and the Centre—are able to borrow at a time when banks are hesitant to lend. Indeed, Das’s pro-growth stance is to be applauded; he appreciates the recovery is fragile and not broad-based. Any other Governor would have pulled the plug on liquidity. To be sure, we would soon leave this easy money environment behind, but going by Das’s track record, the exit should not be too hard.