The US Federal Reserve went full throttle on Monday, announcing massive rescue plans to tackle the Covid-19 impact on the US economy. Aside from an unlimited bond-buying programme (it had previously announced the purchase of $500 billion of treasury securities and $200 billion of mortgage-backed securities), the Fed announced new credit facilities and a Main Street Business Lending Program to support small- and medium-sized businesses (SMBs).

In India, there are now widespread concerns that the Reserve Bank of India is way behind the curve in announcing concrete measures to tackle the pandemic situation. The RBI has so far provided additional liquidity through long-term repos and open market operations (OMO). Can it take cues from the US Fed’s actions and have its own ‘whatever-it-takes’ moment?

While the RBI may have limited scope to offer credit facilities similar to the Fed, there are instruments within its existing toolkit that it can deploy more aggressively, according to Suyash Choudhary, Head – Fixed Income, IDFC AMC.

“The RBI needs to cut its policy rate immediately by at least 100 basis points. Next, it will have to offer more LTROs (long-term repo operation) at a revised lower repo rate (of say 4.15 per cent). This is to ensure cheap long-term funds to banks. The RBI will also need to launch an unlimited OMO programme to enable the collapse of risk-free rate. And, finally, it can provide non-bank participants with lines of liquidity by buying their holdings in AAA-rated bonds,” said Choudhary.

What did the Fed do?

The Fed has essentially done three things to save the US economy from a bull-blown financial crisis.

One, after announcing a $700-billion bond buying programme just a week ago, it has assured unlimited bond purchase to smoothen the market and ensure effective transmission of policy action. It will also start buying commercial mortgage-backed securities.

Two, the Fed will establish two facilities to support credit to large corporates — the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds. The former essentially implies direct loans to corporates (from the Fed’s balance-sheet) and the latter involves the Fed buying corporate bonds from the secondary market and also debt ETFs that invest in corporate bonds.

The PMCCF will allow companies access to credit and borrowers may choose to defer interest and principal payments during the first six months of the loan (can be extended by the Fed).

Three, the Feb will establish a Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans etc. Essentially, the Fed will lend to holders of certain AAA-rated ABS, backed by newly and recently originated consumer and small business loans.

It will soon also announce a Main Street Business Lending Programme to support SMBs.

Multiplier effect

All the three credit facilities — PMCCF, TALF and SMCCF — will be provided by special purpose vehicles (SPVs). The Department of the Treasury, using the Exchange Stabilisation Fund (ESF), will make an equity investment in the SPVs. The treasury will provide $30 billion in equity to these facilities.

The Treasury providing capital (equity) to the credit facilities via SPVs will have a multiplier effect. It will essentially allow multiple times lending (akin to a bank leveraging its capital manifold), providing $300 billion in new financing.

Can the RBI draw lessons?

With the Centre constrained by its limited fiscal space and the banking system in doldrums, the RBI may also have to don the lender’s suit soon. A limited equity infusion by the Centre could have a multiplier effect and lead to multiple times lending to stressed sectors and companies, particularly to the SME segment.

On the flipside, such direct lending (from the RBI’s balance-sheet) does create a moral hazard. But these are desperate times calling for desperate measures and the Centre and the RBI can look at such a tool with a targeted approach. As such, unlike the Fed (which can do unlimited printing of dollars), the RBI’s scope (as also of other emerging countries) to provide credit facilities may be limited.

Hence, with a special focus, the RBI can take on securitised loans of small businesses, for starters.

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