Interest rates have adjusted following the repo rate cuts but as is the case with any rate cut cycle, it is never a 100 percent transmission.
"While an immediate announcement of restructuring may not be the first option, targeted support to the high-risk sectors and subsequent issues on restructuring and other measures should be explored. The bottom line should be that the risks to financial system through dislocations in the economy should be kept to the minimum," Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q) What are your thoughts on RBI policy move and was it a need of the hour?
The RBI policy rate cut will be helpful in further lowering the overall interest rates in the system. Along with supportive liquidity measures, it will help in reducing the costs for the corporate debt too.
However, the issue of credit risk remains which will imply that a distinction between stronger and weaker companies in terms of borrowing cost will likely continue.
The extension of moratorium will be helpful in providing relief to the stressed borrowers as they continue to tide over impact of the slump in economic activity. But that would also imply the true extent of impact on cash flows an ability to service and repay existing debt will not be visible till the moratoriums continue.
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?
Yes, given that the true impact of the COVID-19 on business and individuals' incomes may not be known, the financial institutions will be at risk once the moratoriums open up.
It is difficult to quantify the impact given that we do not know the true extent of the slowdown yet. How firms cope up as the economy opens up, what will be the consumer behaviour in the post lockdown phase, as also what kind of government support comes through will be important inputs into how the overall financial system stress shapes up.
Q) Experts as well as corporates prefer one-time loan restructuring of sectors which are under stress like real estate, hospitality etc. But bankers disagree and they want to wait till the opening of full economy to get the actual picture. What are your overall thoughts on this topic?
I would rather say that regulatory moves need to be made continuously. The banks will obviously not understand the cash flow situation for a lot of the companies till moratoriums continue.
However, as a first step it is essential to engage with at least the high-risk sector companies and build out scenarios to the extent of impact the banks' books may see. Incidentally, it may not be restricted to companies but also to individuals who may be going through an extended period of income/job losses.
While an immediate announcement of restructuring may not be the first option, targeted support to the high-risk sector and subsequent issues on restructuring and other measures should be explored.
The bottom line should be that the risks to financial system through dislocations in the economy should be kept to the minimum such that the financing in post-COVID-19 world is not constrained by a weaker financial system and thereby risking a longer term weaker growth trajectory.
Q) Do you think deposits and savings rate will be cut after the hefty repo rate cut seen since last year? Also is the rate transmission happening on the ground?
Interest rates have adjusted following the repo rate cuts but as is the case with any rate cut cycle, it is never a 100 percent transmission. Deposits and savings rate have seen some reduction as well as lending rates, especially the repo rate-linked loans.
There has been varying degree of transmission into the debt market though over the past few months the surplus liquidity has helped ease rates.
However, the cost of liquidity is now relatively less important than availability of liquidity and that too one which can be passed on with lower credit risk.
Q) Do you think a further repo rate cut is needed as RBI stays accommodative?
There is definitely space for lower rates, may be to the extent of another 25-50 bps depending on the extent of the slowdown.
Q) Do you think the RBI needs to remove the risk aversion as there is substantial liquidity in the banking sector?
The banks are still risk averse even after the large liquidity surplus. With this regard, both the RBI and the government need to address the credit risk issue.
Q) Are these measures from RBI and the government enough to revive the economy and what more measures are needed?
Till now the supply side has been given a support, which works as the economy starts to revive. However, a judicious mix of demand and supply side measures are ideally required with a much more focused demand push required once economic activity has stabilised.
Q) What are your thoughts on inflation and economy 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?
We see FY21 real GDP growth at around (-)5.8 percent. But honestly, this estimate has further downside risks as well as some upside risks and till we see how the economy is shaping up, these estimates will be in state of flux.
However, the demand drivers are well understood. Private consumption will be weak but recovery will be relatively faster in low ticket items while high ticket items and debt driven consumption will continue to be weak.
Investment demand will be extremely weak given that all three economic agents will have constraints. Households will unlikely immediately pick on debt for real estate investments, governments will be unlikely to have space for capex especially given the magnitude of revenue slippages and focus on revenue expenditures, while private sector would much prefer to conserve their balance sheets than expand on their investment plans.
The remaining push in the form of government expenditure remains the only driver for growth besides part of private consumption. Overall, FY21 is unlikely to see much growth unless a large aggregate demand stimulus is implemented.
Consequently, FY22 optically could see a large growth because of the base but sustenance of growth will be dependent on the degree of impact of COVID-19 on the balance sheets of financial sector, corporate sector, households and governments.
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