How RBI managed to boost its surpluses: Business Line 31st May/1st June 2021

 

Revenue from foreign and domestic investments apart, there was a spike in RBI’s holdings of GSecs for which it earns interest

The transfer of RBI surplus of nearly ₹1 lakh crore to the government sounds good as it helps a lot to balance the Budget. As the announcement comes in May, it would be used in the Budget for FY22 as the government follows the cash accounting system where income is reckoned when received. In the previous year, the surplus was ₹57,132 crore.

For FY22, the Budget has targeted an amount of ₹53,510 crore from the RBI, banks and FIs. The target has been exceeded and will be very helpful now as it can be used for any Covid-based extra-budgetary expenditure or to shore up revenue which may dip due to lower tax collections.

The RBI accounts are quite singular in terms of what drives activity during the year. Being the central bank there are no limits on what the RBI can do in terms of creating money and hence the balance-sheet size can be increased based on the conditions in the economy. Interestingly, the balance-sheet size increased from ₹28.9 lakh crore in 2014-15 to ₹41.03 lakh crore in 2018-19 (July-June). This is an increase of ₹12.13 lakh crore. But in 2019-20, the size increased to ₹53.34 lakh crore which is an increase of ₹12.31 lakh crore and further by ₹3.72 lakh crore in the next nine months ending March 2021.

In 2020-21, for example, around ₹39.51 lakh crore was in foreign investments and another ₹13.33 lakh crore in domestic investments. Intuitively it can be seen that as the investments increase, the revenue of the RBI goes up which translates into higher surpluses. This happens in the normal course of activity.

During the year, the RBI undertakes OMOs (open market operations) where government paper is bought in exchange for liquidity to banks, which increases holdings. In FY21, for instance, the RBI bought securities worth ₹5.07 lakh crore and sold ₹1.94 lakh crore with a large part being in the nature of Operation Twist, where there was shuffling of securities. A net purchase of around ₹3 lakh crore resulted.

Simply put, by just undertaking OMOs, the RBI could have earned an additional income of ₹18,000 crore, assuming an average return of 6 per cent on these bonds. Here there is no cost for the RBI.

Similarly, the LTRO/TLTRO operations earn the repo rate for as long as they are in operation which adds to the income of the central bank. And, finally, as dollars flow into the economy and the RBI mops them up and the forex reserves increase, there is income to be made again by the RBI. For all these operations there is a virtual zero cost increase in money supply.

Last year, around $100 billion of forex came into the country, which is around ₹7-7.2 lakh crore. With a return of even 2 per cent, the income would be around ₹14,400 crore. Therefore, normal central banking activity which includes monetary policy operations leads to an increase in the income of the RBI.

The use of reserves of RBI as transfers to the government is now passé. With the RBI expanding its operations on the liquidity front to maintain stability in the system, there are two things happening. First, interest rates have been stabilised by yields being kept low.

Second, through OMOs which take place even in the face of surplus liquidity, there is a tendency for GSec (government security) holdings of the RBI to increase which then yields an income to the central bank.

In fact, OMOs ensure that even though at the primary stage banks bid for GSecs, the pre-defined quantum of OMO ensures that by monetary policy action the funds flow back to the banks.

Interestingly, there was a time when there was the concept of private placement of GSecs of the government with the RBI, which led to monetisation of the debt. This was disallowed post 1997 when it was decided that the government has to borrow from the market with the caveat that the un-subscribed part of the debt could devolve on primary dealers.

But with OMOs being a legitimate tool, the same was being done when the RBI purchases bonds in the market. The anomaly in the market since last year is that OMO purchases have been reckoned at a time when there was surplus liquidity in the system.

The aim ostensibly was to temper yields, which was achieved. But the resultant holdings of GSecs of the RBI increased sharply which helped the government finally as the interest paid on debt finally comes back as the transfer of surplus from the RBI, which would not have been the case if the securities were held by the banks.

Assets of US Fed

This is an inherent advantage in central banking. The Fed, for example, had assets of around $870 million in 2008 at the time of the Lehman crisis.

With the QE programme it rose to $4.5 trillion in early 2015. There was some normalisation between 2017 and 2019 when the size was $3.8 trillion. In May 2021 it is around $7.9 trillion.

Hence, all monetary intervention which involves provision of liquidity enlarges the balance sheet of the central bank.

As the balance sheet of the Fed increased from $4.1 trillion in 2019 to $7.3 trillion in 2020 the surplus that was transferred to the Treasury increased from nearly $54 billion to $87 billion. The gain was to the government.

Therefore, central banking is an art when the dynamics are looked at closely. It is a win-win situation when the central bank plays an active role in debt management of the government.

The government gets to run high deficits knowing very well that the central bank will manage the programme.

The use of open market operations balances liquidity in the system and has the government pay interest to the central bank rather than the banks on the holdings of the latter, which then comes back as surpluses to the former.

GDP growth number: A pleasant surprise, but will it help in FY22? Business Standard 31st May 2021

 The GDP growth number for FY21 was going to be a point of interest for two reasons, even though it refers to the previous year and is not fresh news, as we are all talking of how Q1FY22 is likely to be affected by the second wave.

The first is that it settles the base on which any projection for FY22 is to be done. The second advance estimate spoke of a decline of eight per cent and any significant variation would get reflected in the forecast for FY22, which is the case now with degrowth of 7.3 per cent.

The second is the Q4 estimate, as it would indicate the recovery trajectory that was in place before the second wave enveloped the country. Growth of 1.6 per cent, hence does show that we were on the right path.

The sectoral performance in Q4 reveals that there was definitely a recovery in manufacturing, construction and finance, real estate etc. which would have boded well for FY22. However, with the second wave leading to a closedown of services in particular progress will remain retarded.

The agriculture sector has performed well this year with 3.6 per cent growth and hence increases expectations in FY22. The recent spread of virus to rural India can be a concern and hence needs to be monitored closely as the sowing and harvest activity can be disrupted on this score. A clearer picture will emerge from July onwards.

The two major engines of growth consumption and investment present a rather subdued picture. While capacity utilisation rates have shown some movement in the last two quarters the GFCF for the year has come down for the year which was on expected lines to 27.1 per cent from 28.8 per cent. The government has probably been able to lift the sentiment to an extent but until private investment picks up there would tend to be lower levels of growth in overall investment.

Growth in consumption has also fallen or the year while for Q4 there has been an increase of 2.7 per cent. The pent-up demand phenomenon has worked to an extent here where an uptick was witnessed in other macro indicators like GST collections and eway bills during this period. This could have augured well for FY22 in the absence of the second wave which has actually pushed back things quite sharply with restrictions put movement of goods and people.

In this context, a useful question to pose is whether all the measures taken under Atmanirbhar Bharat have managed to alleviate conditions during the year. On the monetary side there has been a sharp increase in flow of funds, though credit has not picked up, which is expected given the demand conditions. The plethora of policies that were brought in including PLI, would probably work only in the medium to long run and does not get reflected here. There were some measures during Diwali time when government employees were given some incentives to spend with advances as well as use of LTC. That may have worked at the periphery, but clearly is not sustainable under the present circumstances where households have spent a lot on health.

All this means that both consumption and investment will continue to be subdued this year as the lockdown has ensured that Q1 is a washout. It also pushes back the train which may have been on the path of faster growth in FY22. While it will definitely look impressive even at 8-9 per cent, the real sense of growth will be missing.

The Power of Six | Book Review — Rethinking Competitive Advantage: New Rules for the Digital Age by Ram Charan: Financial express 30th May 2021

 

A book outlines six principles which can be applied to any company that wants to be competitive

anagement books talk a lot of common sense and often one looks back and asks a question: if the layman can make sense of what is written, why are CEOs not able to see the same? This is a common question which the reviewer would like to ask when reading any book on the subject. The book by Ram Charan, Rethinking Competitive Advantage: New Rules for the Digital Age, reiterates what all CEOs should already know.

The author talks about competitive advantage in the framework of digital companies, but these principles work everywhere as the world has turned digital whether or not we like it. It has to be accepted and all strategies adopted by companies have to keep this as the fulcrum. Those who are better able to leverage the digital world will remain ahead and, hence, get that competitive advantage. Gone are the days when one got advantage through, say, a physical product which tasted better or looked better, if we are talking of FMCG goods. That is passé and the new rules are different.

Let us see what Charan talks of in this context. He outlines six principles which are very insightful though sound simple enough. The first is to focus on consumer experience. This, one would have thought, should be given because, irrespective of the product or service, finally what matters is the consumer who buys the deal. Hence, the competitive advantage is not so much in having something than doing something. Here, mindsets have to change for traditional companies and the everyday example of e-commerce can be given to explain how this works. He gives the example of Kishore Biyani going to the shop floor and observing different categories of shoppers looking at different products and accordingly customising them on the shelves. A simple observation like watching village girls look at jeans in the store made him launch a different set of products as this became a part of the attire even while going to temples. This is enhancing customer experience.

The second principle is to keep looking at AI and ML and design algorithms to drive business and get that advantage. Jack Ma had no knowledge of technology, but was able to conceive algos to gather, process and transmit digital information of all products and customers across his network to create Alibaba. A digital platform fuses the ecosystem together and relays data to and from from a large number of sources.

His third principle is quite singular where he shows that companies actually compete with the ecosystem and not between themselves. Those that can take the ecosystem along and enable it to grow with the company tend to do better. Hence, if we are talking of e-commerce companies, they need to take the entire supply chain, as well as payments partners and the delivery chain to ensure that everyone has a share in the pie and has incentive to work with the pivot company. Therefore, it is not so much as Flipkart competing with Amazon as much as each of them with their ecosystems. Those that collaborate the best would stay ahead.

Fourth is to create value for the shareholder. Digital companies have to create new models for making money in ways that power their growth and allow them to serve customers and shareholders at the same time. Focus has to be on money-making rather than earnings per share. Here, he describes the models used by Uber, Netflix, Apple to grow this ‘cash rather than business’.

His last two principles are more on the human resources side where he talks of the importance of teams and leadership which are quite interrelated. In his words, people, culture and work design form a social engine that drives innovation and execution personalised for each customer. Teams move from being product-centric to customer-centric. This can be in terms of after-sales service, dealing with empathy to problems they face, prompt recourse to complaints, etc. Fidelity had its way of understanding financial novices and got to advise them on how to deploy their funds. This requires strong teamwork and understanding requirements of customers.

Last is leadership where leaders need to continuously learn, imagine and break through obstacles to create change. Here, it is absolutely important for them to take their team along and also accept the other four principles if the enterprise is to stay ahead. He gives some traits of a digital leader which can read like a textbook: think in terms of 10x or 100x, comfortable with data-based analysis, willing to create and destroy, literate with algorithms, willing to reconceptualise organisations and so on. He also warns that leaders fail when there is poor allocation of cash and there is failure to hire and train the right people. Leaders need to get out of the web of outdated theories and not go for incrementalism and short-term thinking.

This is a must-read for all CEOs who must have an open mind and be willing to introspect because that is the only way to go ahead. Traditional companies are also moving along this path and the pandemic has forced every company to look at the digital option. Therefore, there will be fierce competition which is why decisive quick action is needed to stay ahead.

Rethinking Competitive Advantage: New Rules for the Digital Age

Ram Charan

Penguin Random House

Pp 202, Rs 799

On ETNow : 25th May 2021

 

https://www.timesnownews.com/videos/et-now/shows/time-to-talk-stimulus-india-development-debate/98440

ETNow: India Development Debate

What to make of RBI’s QE: The govt was the winner in 2020 and is so again, in the latest round: Financial Express 25th May 2021

 The challenge with any unconventional monetary policy is that it runs the risk of adverse effects when ended. This was the problem with the US Federal Reserve’s ‘quantitative easing’; when a rollback was expected in 2013, it precipitated the ‘taper tantrums’. It was similar, though very diluted, in India’s case when RBI spoke of rolling back the CRR-cut last year, which was interpreted as being the end of the easy-money. The recent announcements by RBI on further liquidity infusion leads to the question of whether this serves a broader purpose.

The QE in the US and the Eurozone saw central banks buy securities from banks to infuse liquidity and generate growth. The Fed’s balance-sheet swelled by $7.8 trillion, thanks to this, by April 2021. Where did this money go? Some got invested in the US, but there was the unintended consequence of funds flowing to emerging markets, and stock markets benefited everywhere. Therefore, when the taper tantrums started, the palpable concern was that there could be an exodus of funds, and the forex markets got jittery.

RBI’s QE is very different, and while the last financial year had the makings of a QE of the Fed variety, it turned out to be very different. QE last year came in the form of LTROs and TLTROs that were combined with OMO purchases to ensure that liquidity was made available to the banks.

LTROs were brought in before Covid struck, and there was issue of Rs 1.25-lakh-crore worth of these. In September, when banks were allowed to reverse these transactions, Rs 1.23 lkh crore of this amount was repaid to RBI. In case of TLTROs, there was a subscription of Rs 1.13 lakh crore. When RBI allowed reversals here, around Rs 37,000 cr was repaid. RBI started the on-tap LTROs in March 2021, and just Rs 5,000 crore flowed in. What does this mean?

First, it could have meant limited the interest in such easing, and the quantum of reversal meant that there was less use of these funds. Second, as the targeted LTRO was meant for specific sectors, there was not much flexibility given to the banks; this, in turn, meant the avenues for deployment were limited. Third, risk-aversion of the banks also meant that banks were worried about the uncertainty on the future of the moratorium announced as well as the possible spike in NPAs.

The curious part of this QE exercise was that all these measures were invoked at a time when there was surplus liquidity in the system. Starting March 24, 2020, RBI also carried out OMO purchases of Rs 5.5 lakh crore (offset with sales of Rs 1.94 lakh crore). Hence, there was a total liquidity infusion of almost Rs 7.8 lakh crore, with net infusion being around Rs 5.9 lakh crore. Now, this kind of infusion was done at a time when the surplus liquidity was going into the daily reverse repo auctions.

Hence, with RBI providing Rs 5.9 lakh crore broadly in net terms through the QE measures, around Rs 4.1 lakh crore was earning 3.35% while funding came at the lowest rate of 4% as the repo rate. Therefore, banks did not find it fit to hold on to the TLTRO/LTRO that was not deployed as it saddled them with a negative value of carriage.

What was the purpose served? The beneficiary was the government as the surplus liquidity in the system was used to support government-borrowing at a low cost. Therefore, the QE in our context has been beneficial to the government with a secondary impact on high-rated corporate bonds which are benchmarked against GSecs. However, bank rates followed an independent path.

The latest measures of RBI are meant to induce liquidity in the second wave of Covid, involving Rs 50,000 crore to the healthcare sector and Rs 10,000 crore to SFBs through SLTRO. But, the first auction had a dull response from SFBs. The winner again is the government as market had to finally acquiesce that the GSec yields should come down. The 10-year paper is now going at less-than-6%—a victory for RBI and the government.

TV Panel discussion: ET Now 21st May 2021

 on a panel  disucssion on ET Now India Development Debate on covid and rural India 

https://www.timesnownews.com/videos/et-now/shows/gauging-the-rural-covid-impact-india-development-debate/98095

TV: Panel discussion on Mirror Now

 https://www.timesnownews.com/videos/mirror-now/urban-debate

May 19th 2021

Why our savers need protection: Mint 19th May 2021

 https://www.livemint.com/opinion/online-views/the-small-savings-dilemma-and-why-our-savers-need-protection-11621352468231.html

Rural demand may not prop up economy: Business Line 19th May 2021

 

Covid 2.0, unlike the first, has hit rural areas too. This could affect farm output and hence rural income and consumption

Last year, the rural demand story was played through the year as the pandemic did not affect rural India significantly. Except for supporting the migrants’ reverse migration, there was nothing serious due to the lockdowns or infections. In fact, the government was quick to up the MGNREGS allocations to provide more employment to those who required a job and the extra hands at work was interpreted as being a blessing to the farm economy.

This time it is different as the second wave has spared no region and what has changed is that the virus has spread to the interiors. This is upsetting because rural areas have less access to testing and medical treatment which complicates the issue, as the discovery of the patient comes with a lag when the infection level is already grave. The chance of mortality increases commensurately. This is why the rural demand phenomenon which was taken for granted last year has to be examined more in detail.

Agriculture is normally associated with the rural economy, though the latter is much larger. It is important to recognise the distinction as the two are not synonymous. Broadly, the rural economy has a 45-50 per cent share in total NDP. Within the rural economy, the share of agriculture is just one-third while that of industry is around 26 per cent and services, 40 per cent. Therefore, when speaking of rural demand, only a part comes from agriculture. Further, within agriculture, 55-58 per cent is from crops and the balance from allied activities such as livestock and forestry.

Given this distribution of GDP and the importance of agriculture to the rural economy, one must be cautious when interpreting the news of a good monsoon as 55-60 per cent of the share of 15 per cent in GDP for agriculture and allied activity is likely to be affected positively, assuming the monsoon is well spread across crops. Here too the distribution between kharif and rabi crops is even at around 50 per cent and we are hence talking of not more than 4.5 per cent of GDP being driven by a very good monsoon and resulting crop.

Cause for concern

The problem with the second wave is that it has spread to the rural areas which is a concern for a variety of reasons.

First, the possibility of farmers getting infected is real which can affect both the current harvest that is going on, especially in Punjab, as well as the sowing of the kharif crop which starts in June. Therefore, while the infection spread is more rampant in the urban and semi-urban regions the percolation to the rural centres can be disturbing. Here, with limited access to medical facilities, the situation can become even more serious.

Second, the local governments at the panchayat level will have to act in advance to ensure that labour is available at the farm level because the benefits of a good monsoon would be eroded in case of the spread of the virus.

Third, the Central Government had lowered the allocation for the NREGA programme this year ostensibly because in February it was felt that a support of over ₹1 lakh crore would not be required. This will have to be reconsidered in case there is further spread of the virus.

Fourth, the possible dip in agricultural production for both the harvests can also mean lower purchasing power during the festival-cum-harvest season. This is an important message for corporate India which has been banking on rural demand once again this year. Given some traction seen last year, there was always a doubt of a repetition of such spending this year. The current spread of infection can affect such plans further.

The non-farm component of the rural economy that is employed in industry and services would typically be in the SME category which gets linked to the mainline industry in non-rural areas. While some part of the output would be catering to localised demand such as tractor repair services or sale of parts for agriculture, there would be a fair share of around 30 per cent of industry which is linked to non-rural industry. Here there can be a dip in demand. Even within the rural centres, the ability to maintain the growth rate would depend on how the allied segments do and this is where the infection spread is critical.

Therefore, the points which emerge here are that first, the role of rural economy in sustaining the rest of the economy should not be overstated against the background of news of a good monsoon. The growth contribution of crops to overall growth as well as generation of income that can be spent on industrial products is limited.

The second is that the spread of the virus in these regions has the potential to push the rural economy down not just in terms of output coming from industry and services but also for spending on the consumption side.

The spread of the pandemic and the subsequent lockdowns announced last year started at the same time as this year but there was a difference. Last year, the pandemic was urban-centric in terms of the regions that were affected, and the farming community was literally divorced from the urban developments — a literal case of being far from the madding crowd.

This time it is different as the rural areas seem to get enmeshed in this spread and what started off as a metro phenomenon has moved rapidly to the urban and semi-urban areas and appears to be touching the periphery of rural India. While thankfully it is not universal and currently confined to Punjab, Maharashtra, Haryana and UP, the potential devastation that can be caused by Covid on the rural economy is even stronger than the El Nino, which is held with trepidation by the farming community.

Quite clearly, the States need to have a disaster relief plan in place and not be caught on the wrong foot as has been seen with the second wave in urban areas in March and April.

In a webinar

 enqube webinar on 6th May 2021

https://www.youtube.com/watch?v=OzLo801O9lU

Poll Position: Making sense of elections and Covid-19 numbers: Financial Express 5th May 2021

 Concerns are being expressed on the huge spread of the coronavirus due to two big events—assembly elections and the Kumbh Mela. Elections have taken place in four states and one UT. Also, there were panchayat elections in Uttar Pradesh, which, being a big state, involved a large number of people. The Kumbh Mela was special as it comes once in 12 years, and people rushed in, perhaps hoping for divine intervention to see them through, and when the virus turned deadly people returned to their homes. All this happened in April.

Arguments are put forth by analysts on whether or not these events actually spread the virus, with their reasoning that this would have happened anyway. The counterintuitive argument is that even where there are no elections, the spread was rapid. The case of Maharashtra is given, which accounted for 60% of the total incremental caseload in March, when there were no events.

There are also sceptics who believe the numbers are underreported as results depend on the number of people being tested. When the capability to test is limited, there will be underreporting and the picture will become grim in May when nobody would like to hide anything as election results are out. The parties that exhorted people to come to rallies all through April will probably threaten them to stay at home or face dire consequences. This is realpolitik.

The accompanying table looks at infection information over March and April. The increase in the number of confirmed cases in these months is shown and the share of various states is calculated to observe the trends. March is when there was no mela and election campaigns were on a small scale. April was the month of heightened activity where infection levels rose for sure.

The spread across states would come out here. May would probably be the month that will have a combination of both lockdowns as well as greater testing and identification of infected people, which will be known four weeks from now. Only states/UTs which have a share of above 1% in incremental cases have been included here. Goa witnessed marginal increase from 0.3% to 0.5%, while Himachal Pradesh maintained a ratio of 0.5%.

In March, Maharashtra accounted for 60% of the caseload; it went in for a lockdown that started as limited hours of operation to night curfews to finally full lockdown with only four hours of business being permitted. Kerala and Punjab have a share of above 5%, which can be attributed to NRIs coming back, carrying new strains of the virus, or the aftermath of farmers’ agitation outside Delhi during winters. Madhya Pradesh, Karnataka, Chhattisgarh, Tamil Nadu and Gujarat had shares of 3-4% each. Clearly, the problem was not widespread, and Maharashtra was the eyesore. It was alleged that social distancing norms were not followed, and the state paid a price for the same.
April was very different.

The reason for the spread across states is definitely not within the realm of economics, especially when it comes to states that were not involved with any of these big-bang events. At the national level, there was an increase in caseload by 6.4 times, which is disturbing. This multiple has some interesting observations.

The first is Maharashtra, which was the most infected state in March. It witnessed a multiple of 2.86 times in April; it means the lockdown had a major impact on the spread of the virus. In fact, the daily count did not cross the 70,000-mark this month even though it rarely went below 60,000 as the infection spread in the interiors. Not surprisingly, the share of Maharashtra came down to 26.7% in April.

Second, the northern states tended to show a higher multiple which gets reflected in higher shares in April. The Kumbh Mela typically finds more followers in the Hindi-speaking belt than the southern states, which could probably be one reason for this surge. Uttar Pradesh fared the worst in terms of number, and with a multiple of 48 had a share of 9.1% in total new infections.

Third, central India (Madhya Pradesh and Chhattisgarh) fared better even though their shares went up as the multiple was 8.2 and 11.5, respectively.

Fourth, in states where elections were held, the picture is mixed. In Kerala, the share remained virtually flat at 6%, while for Tamil Nadu the share increased by less than 1%. For West Bengal it was an increase from 1% to 3.4%, which, though, not as scary as in Uttar Pradesh, is a concern and has to be monitored closely. Assam witnessed an increase from 0.1% to 0.5%, while it was flat at 0.2% for Puducherry.

Fifth, Gujarat and Punjab have done better with multiples of 7 and 2.35, respectively, and the curbs put in terms of lockdowns have worked to an extent in slowing down the spread.

Sixth, other southern states Andhra Pradesh and Telangana have shown some stability with multiples of less than 20. Lockdowns that restrict free movement of people would definitely help to ensure that the infection does not spread to the interiors.

Seventh, while Uttarakhand does not appear to have reached ominous levels, the government has to be careful as the Kumbh Mela originated in this state and several devotees came from the interiors which are fast catching infection. The multiple of 24 sends a warning here. Lastly, Delhi is the only state after Uttar Pradesh to increase its share in total cases by almost 5%.

On the positive side, there were nearly 40 lakh recoveries in April, of which Maharashtra had a share of 36%, followed by Delhi at 9.3%, Chhattisgarh at 6.8%, Madhya Pradesh at 4.6% and Tamil Nadu at 4.2%.

The month of May will really be crucial and local lockdowns will deliver a negative shock for business. But they may help to control the spread of the virus. Admittedly, it is a bigger challenge as the percolation is to the interiors, which are even more ill-equipped to treat patients than the urban areas that have been exposed of late. Truly, it is a grim situation, and the country has to be prepared for further shocks.

RBI gets into the act; lays foundation for more measures going ahead: Business Standard 5th May 2021

 

The signal really given by the RBI is that while it does believe today that things have not taken a turn for the worse as all enterprises are better prepared than last year while facing lockdowns

The Reserve Bank of India's (RBI's) emergency measures announced on Wednesday are well guarded and tuned to the evolving situation. After taking cognizance of the pandemic impact, the RBI believes that the economy has not yet derailed, and some of the indicators for April are indicative of stability rather than disruption. This view may be contested at the ground level, with several small businesses being shut in the midst of uncertainty. Nonetheless, there have been some measures announced from the point of view of supporting the economy.

The liquidity measures announced are more in line with what was done last year. The special long-term refinance option (LTRO) for small finance banks for Rs 10,000 crore is to ensure that smaller enterprises benefit directly from this measure. This is a new dimension added to policy measures of last year.

Similarly, the Covid loan book is a very progressive measure where banks can lend up to Rs 50,000 crore for all related sectors, which include hospitals, oxygen manufacturers, equipment, etc. after getting the funds at the repo rate. This will lower the cost for the borrowers. The innovative part is that all such funding would also get a benefit for the banks in terms of being able to place an equivalent amount in the reverse repo window at 40 bps higher rate. Therefore, hypothetically if Rs 50,000 crore is lent to the borrowers in this category, Rs 50,000 crore of surplus funds of the system can be put in the reverse repo and earn 3.75 per cent instead of 3.35 per cent. Hence, there is a dual benefit for the banking system, as these funds would come in at least 1.5-2 per cent lower than their usual cost of funds and would also have an add-on of 40 basis point (bps) on the reverse repo operation.

The other significant measure relates to restructuring of loans given to individuals, small business and small-and-medium enterprises (SMEs). As this segment gets affected more than the larger enterprises; the three levels of restructuring of loans for these categories into new and existing cases will benefit them for sure.

The measure to increase the maximum number of days a state can be in overdraft mode is very proactive as given that the lockdowns this time are regional and will affect the revenue flows of the state governments. Such facilities will offer more room to them when managing their fiscal balances.

The signal really given by the RBI is that while it does believe today that things have not taken a turn for the worse as enterprises at all levels are better prepared than last year while facing lockdowns, there could be surprises on the infection side that can engineer various measures by states that can affect business. However, the RBI will remain proactive and get in measures to address worries.

Presently the central bank does not feel there is need for any moratorium and the focus is hence more on making available funding for the healthcare sector in particular besides the SMEs. A payment crisis is definitely not seen presently. To that extent, there could be a rise in non-performing assets (NPAs), banks can make use of the countercyclical provisioning buffers.