With economic situation still wobbly, all eyes on RBI

Shishir Sinha New Delhi | Updated on August 06, 2020

Call for rate cut, loan restructuring gets strident as key indicators disappoint

With July economic indicators none too rosy, expectations are high for a policy rate cut and a loan restructuring plan when the Monetary Policy Committee (MPC) makes its announcement on Thursday.

RBI Governor Shaktikanta Das, who will present the resolution after a three-day meeting of the MPC, is expected to make some policy announcements though retail inflation has breached the RBI’s 6 per cent comfort level.

The Purchasing Manager Index (PMI) for manufacturing, e-way bill value data and the GST collection numbers released over the last five days show that the economyis still some distance away from normality. Only the PMI for services offers some optimism.

By all indications, local lockdowns have had an impact on the economic recovery. .

PMI for manufacturing came down to 46 in July from 47.2 in June. The agency responsible for the preparation of the PMI, IHS Markit, said on Wednesday that ongoing lockdown restrictions stifled demand and forced companies to cease operations.


Similar was the tone of the Monthly Economic Report of the Finance Ministry. It claimed that with India unlocking, the worst seems to be over as high-frequency indicators show an improvement from the lows the economy hit in April.

However, “risks on account of rising Covid-19 cases and intermittent State lockdowns remain,” it cautioned.

Disruptions in supply chain were also reflected in e-way bill generation. According to the latest data, the assessable value of e-way bills for July was around ₹13.6-lakh crore against ₹12.4-lakh crore in June but still lower than ₹15-lakh crore in the pre-Covid period.

“Given the measures for unlocking, it should have been much higher, but local lockdowns are making things difficult,” a Finance Ministry official said. This was also reflected in the GST collection, which dipped to ₹87,422 crore in July from ₹90,917 crore in June.

Experts’ take

Dharmakirti Joshi, Chief Economist at Crisil, feels growth is at a much bigger risk than inflation.

“It requires a rate cut and liquidity support and then restructuring of loan is probably a more durable solution than extending the moratorium,” he said.

Aditi Nayar, Principal Economist at ICRA, had a similar opinion about a rate cut.

“In our view, the MPC should look through the transient above-target inflation readings, and front-load rate cuts, given the dismal outlook for the real sector and substantial systemic liquidity, which will enable faster transmission. We anticipate an asymmetric cut of 25 basis points in the repo and 35 bps in the reverse repo rate,” she said.

Sunil Sinha, Principal Economist with India Ratings, said it is a tough time for the RBI to come up with an answer that satisfies everyone. Under these circumstances, the key monitorable, from the rate perspective, would be the retail inflation.

“These are tough times, the way Covid pandemic is playing out, extension of moratorium or restructuring of loan looks like the most likely outcome,” he said.

Published on August 05, 2020

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