Yes, Governor Das, Liquidity is Key

The Economic Times     15th December 2020     Save    

Context: Reserve Bank of India Governor says the premature withdrawal of liquidity would hurt growth, due to it being fragile and not broad-based as yet.

Steps taken by RBI:

  • Kept policy rates unrevised and monetary policy accommodative, despite supply rigidities spiking consumer price inflation to 7.6% in October.
  • The forward-looking move to overhaul market design in credit default swaps.

Way Forward:

  • Policy-induce increased public investment and big-ticket infrastructure project: It will help crowd-in private investment, so as to shore up the growth momentum.
  • Credit enhancement fund Specifically for the infrastructure sector: for a partial guarantee of bond payments in a credible regulatory framework.
    • As institutional investors and Foreign Portfolio Investors (FPI) have a scant appetite for lower-rated assets including greenfield infrastructural investments.
  • Engineer an active corporate bond market to fund infrastructure:
    • Credit availability will not, by itself, induce growth, as only 50% of the guaranteed emergency credit line offered by the government for companies has found takers.
  • Use corporate bonds in RBI’s liquidity adjustment facility (LAF): to help rev up an active and vibrant bond market, as would exchange-based corporate bond repos.
    • Many developing and middle-income economies have bond market sizes over 30% of GDP (India’s bond market is barely 17% of GDP)

Conclusion: India’s bond market should outgrow the current level of 17% GDP, taking cues from many developing and middle-income economies having bond market sizes in excess of 30% GDP.