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Need more stimulus with focus on GST cut, wage support, higher MNREGA spend'
May, 25th 2020

The Rs 21-lakh-crore stimulus package is not enough to revive the economy. The government has been reluctant to increase spending substantially due to fears of rating downgrade. However, we may need one more stimulus package in the coming months. The next package could focus on GST rate cuts, wage support in some form, and higher spend under MNREGA," Anagha Deodhar, Economist at ICICI Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpt:

Q: What are your thoughts on RBI policy and was it the need of the hour?


We did expect more rate cuts by the RBI and use of more unconventional measures. The repo rate is now at an all-time low. This was the second off-cycle rate cut, it shows the urgency with which the RBI thought it needed to act. However, we remain sceptical about the effectiveness of rate cuts in stimulating demand in the current situation.

 Q: Most experts feel there could be more pressure on banks after six months' moratorium. Do you agree, why and how much could be the impact?

It depends on how long we are in lockdown and how much time the economy takes to recover from the shock. We are expecting the economy to contract by 3-4 percent in FY21. While first half of FY21 is likely to be very bad, we could see recovery in the second half. In this scenario, we don't anticipate severe pressure on banks after six months. However, if recovery takes longer and individuals and businesses still find it difficult to repay loans after the 6-month moratorium ends, we could witness rising NPAs and stress in the banking sector.

Q: Experts and corporates prefer one-time loan restructuring. But bankers disagree. They want to wait till the opening of full economy. Your thoughts?

Some sectors (such as real estate) were facing difficult times even before COVID-19 hit us. I think government and/or banks should provide relief to businesses that were profitable before the pandemic. For restructuring, we need to know the full impact of lockdown on certain businesses. Since that situation is still evolving, it's too early to chalk out restructuring plans. As of now, we need temporary measures to keep businesses functioning (such as moratorium extension, easing access to working capital etc).

Q: Do you think deposits and savings rate will decline significantly after the hefty repo rate cut seen since last year? Also is the rate transmission happening on ground?

We have now entered a low interest rate regime. As banks pass on RBI rate cuts to their borrowers, it is natural that they will bring down cost of deposits as well. However, while banks are likely to adjust deposit and savings rate in line with recent policy rate cuts, we do not expect a significant reduction in the same.

As far as transmission is concerned, following last rate cut by RBI several banks reduced MCLR although by a much smaller magnitude. So, on the banking side, transmission is slow and partial. Following current repo rate cut, 10-year bond yield fell below 6 percent so we are seeing relatively better transmission in debt market.

Q: Do you think further repo rate cut is needed as RBI stays accommoditive till the sign of revival of economy?

We remain sceptical about the effectiveness of rate cuts in stimulating the economy in the current situation. This is particularly true when you have high inflation and incomplete transmission of past rate cuts. Also, we should keep real interest rate in mind when cutting rate. We think there is scope for 25-50bps reduction in rates now.

Q: Do you think the RBI needs to remove the risk aversion as there is substantial liquidity in the banking sector?

High risk aversion in the banking system is one of the most pressing challenges of current time. Banks have been parking huge surplus liquidity with the RBI, even at very low reverse repo rate. Their reluctance to lend is understandable - economic outlook is weak and lot of their fresh advances could turn bad if economy takes longer to recover. Hence, addressing their risk aversion is a very important step in de-clogging credit flow. Recent announcements of government-guaranteed loans in the second stimulus package could solve the problem to some extent as banks will not retain any risk on their books.

Q: Are these measures from RBI as well as Government enough to revive the economy?

Our monetary policy response has been very active since the onset of COVID-19. Along with rate cuts, the RBI has done a lot of things to ease pain such as moratorium on term loans, easing access to working capital, increasing WMA limit for government etc. However, the fiscal response has been relatively modest. Although the government announced Rs 21 lakh crore stimulus package, the actual fiscal cost of the package is around 1 percent of GDP.

This, in my opinion, is not enough to revive the economy. The government has been reluctant to increase spending substantially due to fears of rating downgrade. However, we may need one more stimulus package in the coming months. The next package could focus on GST rate cuts, wage support in some form, and higher spend under MNREGA.

Q: What are your thoughts on inflation and economic growth for FY21 as most experts feel it could be negative or flat growth and RBI also said FY21 GDP growth is seen in negative territory. Also does it mean there would be strong revival in FY22 considering current conditions?

The economy looks certain to contract in FY21. We could see double-digit contraction in Q1FY21. Second half of the year could be better as cumulative monetary and fiscal stimulus and pent up demand provide tailwind to growth. Overall, the economy could contract by 3-4 perrcent in FY21. Inflation is likely to remain elevated in Q1FY21 as supply constraints and hoarding keep prices high. However, weak aggregate demand is likely to push inflation down later in the year. In FY22, growth could see sharp rebound due to low base and some pick up in momentum.

Q. What are your thoughts on bonds and yield in the short to medium term?

After RBI repo rate cut, 10-year yield fell below 6 percent. With more rate cuts expected, we expect bond yields to remain soft in the near term.

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