Vijay Kumar Gaba

In an unscheduled press conference yesterday, the RBI governor admitted that the Covid19 pandemic has recently intensified in India. This intensification could derail the still fragile economic recovery. He implied that the impact on livelihoods due to restrictive access to workplace, education and income mediums could be significant and needs immediate attention.

The governor also highlighted that “The global economy is exhibiting incipient signs of recovery as countries renew their tryst with growth, supported by monetary and fiscal stimulus. Still, activity remains uneven across countries and sectors. The outlook is highly uncertain and clouded with downside risks.” He underscored that “Consumer price index (CPI) inflation remains benign for major AEs; in a few EMEs, however, it persists above targets on account of firming global food and commodity prices.”

The governor also highlighted the emerging inflationary pressures and softening bias in bond yields as follows:

·         “CPI inflation edged up to 5.5 per cent in March 2021 from 5.0 per cent a month ago on the back of a pick-up in food as well as fuel inflation while core inflation remained elevated.”

·         “Domestic financial conditions remain easy on abundant and surplus system liquidity. The average daily net liquidity absorption under the liquidity adjustment facility (LAF) was at ₹5.8 lakh crore in April 2021. The first auction under G-SAP 1.0 conducted on April 15, 2021 for a notified amount of ₹25,000 crore elicited an enthusiastic response as reflected in the bid-cover ratio of 4.1. G-SAP has engendered a softening bias in Gsec yields which has continued since then.”

In fact the governor announced that “Given this positive response from the market, it has been decided that the second purchase of government securities for an aggregate amount of ₹35,000 crore under G-SAP 1.0 will be conducted on May 20, 2021.”

It is therefore clear that regardless of the inflationary pressures, the liquidity conditions may remain benign for 2021 and no thought of monetary tightening may be entertained by MPC/RBI. Persistently, poor credit growth also supports this view.

It is pertinent to note that Banks’ non-food credit growth was just 4.9% in March 2021, almost a 4yr low. Credit growth in service and manufacturing sectors continues to remain materially below par; though agriculture and personal credit is buoyant. During March 2021, industry credit off grew a dismal 0.4% yoy, while credit to large industries segment continued to contract (-0.8% YoY). The credit growth pickup in February 2021 failed to sustain. The April credit growth number may still be disappointing, given the widespread mobility restrictions across large states.

Though RBI governor emphasized strongly on the need to support small, medium and unorganized businesses; the credit growth to this segment remains anaemic, highlighting the extreme risk averseness of lenders. Loans for Housing & education; and to weaker sections have also suffered recently. Given that MCLR rates are now stable as most of the transmission of policy easing has already occurred, any material fall in rates may not be expected in 2021.