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RBI & govt going for a calibrated approach as Covid situation extremely uncertain: Sanjeev Sanyal

‘We are more than willing to do what is necessary but it needs to be targeted in the right place’

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Last Updated: May 22, 2020, 08.13 PM IST
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Sanjeev-Sanyal--CEA
We welcome this cut in interest rate by 40 bps. It was the need of the hour.
We will do what is necessary to solve the issue of transmission, says the Principal Economic Advisor.

You are someone who understands the economy and the relationship it has with the markets as well. If I could first begin by just getting your quick reaction to what we saw on Dalal Street; the markets at large and of course the bond markets when the RBI governor started speaking. It is very clear that investors, the market stakeholders have been left wanting for more. Is there an indication that the moves by RBI are in fact very much needed but more could have been done?
I do not get too swayed by movements in the financial markets. There are many things that affect it including international movement. So I would not like to comment on how the market perceives it based on what happens in the last 10 minutes. All I will say is, the RBI governor’s assessment of the situation is spot on. We welcome this cut in interest rate by 40 bps. It was the need of the hour. He also mentioned a slew of measures which complements many of the things we have also done from the finance ministry’s side. So you can clearly see that we are working in tandem step by step and in a calibrated way and are responding to an evolving situation. Let me say that the Reserve Bank governor was absolutely right when he said that there is clearly stress in demand conditions both in India and internationally. He has obviously put together a package for the moment and I think you will see that the ministry of finance will work in tandem and take this forward.

I want to use some of the phrases that the governor also used. The Monetary Policy Committee is of the view that the risk to growth is the “gravest”; he has talked about demand collapsing and it is not just today but previously as well. We have heard the RBI Governor Shaktikanta Das talking about doing whatever it takes against this war. We are fighting against Covid and utilising the entire ammunition which is available with the RBI. Can I ask you then what is it that the RBI perhaps is waiting for? Today’s moves are fantastic. They were very badly needed but it is not a bazooka that has been fired by the RBI governor. So with the kind of risk that is there to growth and with demand collapsing, why save it for later?
I think we have clearly communicated at multiple times that our approach is a different one. For other countries, maybe it makes sense for them to have done one grand package and then that is the end of it. We have gone for a more calibrated approach and the reason for that is simple. We are obviously dealing with an extremely uncertain situation. Our assessment is that this is not a sprint but a marathon and that we need to put these resources down. We are more than willing to do what is necessary but we are doing it in a more calibrated way. Simply putting out demand expansion measures when most of the country is under lockdown is not very helpful. So we have to make sure it is targeted in the right kind of place. Simply throwing it into the economy without thinking through exactly what the transmission mechanisms are will not be worthwhile.

So whether it is the ministry of finance or the Reserve Bank, we work very closely together. Our view is we will do what is needed but we will do it in a calibrated way, getting information along the way and putting it together. You are repeatedly seeing both the finance minister and the Reserve Bank governor every week or so come out to tell you a bunch of new measures and then we nuance it according to the feedback we get and we will do more if necessary.

You have seen rate cuts in the past. You have seen measures by the RBI to make sure that there is transmission of liquidity and that liquidity percolates down the value chain and that has not happened. Let us not talk about what is happening with the AAA-rated companies; only they are getting access to liquidity but the fact also is you have got nearly Rs 8 lakh crore parked by the banks given what is happening today in the ecosystem. It almost seems criminal that the Rs 8 lakh crore is just being parked and nothing has been done about it. What is it that the RBI and the government can do together to make sure that those funds with the banks are indeed used optimally?
The issue of transmission is really a serious one and we take it very seriously. For example, the government announced last week that it would be doing a 100% guarantee for the additional loans given out to the MSME sector. So we fully appreciate this particular problem with transmission. If you look at the government bond market, while short-term interest rates have declined very sharply, even after this announcement you can see that 10-year yields have dropped to somewhere in the 5.85% which in my view is very-very high even now. I think it should be down maybe below 5% at this point.

Anyway, the point is we take this matter seriously and we are now working very closely with the banks and understanding their concerns. But at the same time, we are also making sure that there is no cascade of defaults. That is one of the issues that obviously we are concerned about and you can see that we are providing moratoriums. The IBC has been laid off and put aside for about a year. So this is not about having one grand set of measures in the beginning. We have to continuously nuance it according to what we do, the feedback we get and then again do it. And we have to have some ammunition for the next round of steps if necessary. So this is something we will take your feedback on and on transmission, we fully agree with you and we will do what is necessary.

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