Liquidity is not the constraint

Liquidity is not the constraint

The Monetary Policy Committee (MPC) chose to wait and watch, holding rates steady, but announced its readiness to accommodate any demand for credit. The MPC projected a negative growth rate for the year, but refrained from putting a numerical target, but estimates vary from –4% to –7%. If the economy shrinks by 5% this year, growth next fiscal would have to be 8.4% for the economy to regain its size of 2019-20. The best efforts of RBI will not be able to push the economy to a path of robust growth. For that, the fisc would have to contribute.

The high point of what RBI governor Shaktikanta Das had to announce on Thursday was a debt restructuring scheme, which would give some breathing space for troubled companies and prevent them from suffering a credit downgrade. The norms for the restructuring have to be worked out by an expert committee headed by veteran banker K V Kamath. Restructuring debt is welcome, but all that it does is the equivalent of helping a drowning man tread water, instead of going down under.

But the point is to pull him out of the water. For that, companies must have order books that fill up and not just debt that has to be serviced, eventually, if not now. A better way to provide troubled companies the funds they need is in the form of equity. While the government has promised a fund of funds for injecting capital in the form of equity in micro, small and medium enterprises (MSMEs), it has not thought of such a scheme for large companies. It should. This is something that RBI cannot do, but the government can. The additional funds for real estate and non-banking financial companies, including microfinance companies, to be routed through Nabard and the National Housing Bank are welcome.

A remarkable feature of RBI’s announcements on Thursday is raising the loan-to-value ratio of gold loans to 90%. This can be construed as an RBI bet that gold prices can only go up, a lead prudent investors should not act on. Gold prices can go up if the rupee weakens and/or gold prices rise in dollar terms. If global growth resumes sooner rather than later, gold will likely fall.