Monetary push is unlikely to be really effective in these markets

On 22 May, the RBI once again had an early meeting of the Monetary Policy Committee (MPC). The stance clearly was dovish but the million dollar query is whether these measures can help?

Another monetary push

After cutting repo rates by 75 bps in March, the MPC has cut repo rates by another 40 bps. This takes the total rate cut to 115 bps since the pandemic first reared its head. The last rate cut takes the repo rates to an all-time low level of 4%. That is not all. MPC also cut the reverse repo rates down to 3.35% in order to make it absolutely unattractive for banks to park funds with the RBI. It is expected that this could give a boost to commercial lending by the banks. Since Sep-18, repo rates have been cut by 250 bps while reverse repo rates have been cut by 290 basis points. But credit demand continues to lag.

Where is the transmission?

It would be naïve to expect credit to pick up in the absence of monetary transmission. Most banks are unwilling to lend to commercial or even retail borrowers. They are already stressed due to the 6-month moratorium on EMI announced by the RBI. Even at very low yields, banks prefer to park the money with the central bank rather than risk NPAs by lending it. Till moratorium on EMIs is reversed, the transmission is not likely to pick up meaningfully.

Losing monetary leeway

There are two aspects to credit demand. Firstly, you need consumer confidence and secondly there has to be business willingness to take loans and invest. At this point, there is neither. Consumer confidence has been low for the last one year as was evident from the demand for consumer durables and cars. Most businesses are also not too keen to invest unless there is clarity on when the economy will be back in full steam.

That is not clear at this point of time. What has happened is that the RBI has now cut rates by 115 bps in the last 2 months with little to show by way of credit growth. The first 75 bps was enough to give indication to the markets that the RBI was committed to keeping monetary policy dovish. The latest round of 40 bps rate cut may not add much value. It may have just limited the monetary options for the RBI.

Focus on fiscal now

The clear focus has to be on the fisc. Monetary measures, in the past, have been more effective in propping up equity asset values than in bringing about growth. At this point, what the economy needs is manufacturing tax incentives, cuts in personal taxes, big infrastructure spending and liquidity for stressed NBFCs. Monetary policy has played its role adequately. It is time to let the fiscal policy do the rest of job. It can actually work better!