The RBI monetary policy did its best to boost the sagging sentiment in the economy but the verdict so far appears to be that the downturn in the economy is too severe for monetary policy to handle, no matter how sincere its intent and varied its approach.

There is no mistaking the intent of the central bank and the MPC to fire growth. It cut the signalling rate by 35 basis points against market expectation of a 25 bps cut. The governor warmly assured the market he will keep liquidity plentiful: “The RBI will use its liquidity management instruments to ensure that the systems requirements for both day-to-day liquidity and durable liquidity are adequately provided,” he said. Further the stance was tweaked to give “growth” an unambiguously priority position: “Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate,” the statement says.

The kindness shown to the NBFC sector was also prominent. Banks can now lend up to 20 percent of their tier 1 capital to a single NBFC borrower, up from 15 percent until today. Likewise, banks can also fulfill a goodish bit of their priority sector obligations by loaning to NBFCs who can on-lend them to farmers, MSMEs or affordable home buyers (up to Rs 20 lakh).

The most effective push to growth comes from the RBI cheapening loans to consumers. Banks now need to set aside 20 percent less capital for a consumer loan than they did hitherto. This means for the same amount of capital they can give more loans or give the same amount of loans at lower rates. This ought to trigger consumption. All good so far.

But what is the market saying. For one, 10-year yields went up. This may be a wrong indicator because yields from 2-year to 9-year bonds fell by 4-5 basis points. But yields on AAA corporate bonds hardly reacted and if dealers are to be believed they are unlikely to dip any time soon. This is because the debt market (like equities) today is in the grip of a huge risk aversion with mutual funds, corporate treasuries and high networth individuals preferring the safety of government bonds or plain fixed deposits and cash. The stomach for risk is ebbing, as treasuries see even mighty companies like Reliance Industries facing downgrades due to higher liabilities and payables.

So does the RBI believe the slowdown is structural or cyclical. “Cyclical” said the governor. The central bank stood by its governor, by cutting the current year’s GDP growth forecast by only 10 basis points to 6.9 percent. But neither carried conviction. Professional forecasters are fast bringing down their forecasts to 6.4-6.5 percent. (JP Morgan and HSBC have both cut the FY20 forecast to 6.4 percent). In the event it appears that the RBI was conscious of the slowing growth but probably didn’t want to earn Delhi’s ire by too steep a cut.

The monetary policy statement bravely argued that the 110 basis points rate cuts so far will fire up growth. But prominent actors in the economy differed. All bankers praised the rate cuts, especially the reduction of risk weights on consumer loans. But most said they won’t up the ante on consumer loans given that retail loans are already showing signs of stress. At the end of the narrative, corporate loans don’t look like getting much cheaper, and bankers don’t look inclined to lend too many consumer loans. Clearly RBI’s loudest growth signals are falling on deaf ears. The heavy lifting will have to be done by the government by addressing each sector: may be an early vehicle scrappage policy for automakers, some tax cuts, some government orders etc. can help. As one industrialist said, government is the biggest consumers of goods and services and even if it starts paying its bills on time, the wheels of the economy may move. The RBI said it will hasten approvals for those wanting to provide platforms for the TReDs (the Trade Receivables Discounting Systems). The government can help the economy a great deal if it forcibly lists all public sector units on the TReDS, which will require them to clear their bills on time. Short point, in such a deep downturn, monetary policy is of marginal help. Government needs to take centre-stage.

A final word on the 35 basis points rate cut, a major departure from central banking tradition where cuts have always been in multiples of 25bps. The governor defended his decision as follows: “the MPC was of the view that the standard 25 basis points might prove to be inadequate in view of the evolving global and domestic macroeconomic developments. On the other hand, reducing the policy repo rate by, say, 50 basis points might be excessive, especially after taking into account the actions already undertaken. Reducing the policy repo rate by 35 basis points was, therefore, viewed as a balanced level of cut under the circumstances.” Clearly the two academics in the MPC didn’t agree with the governor. The market too was confused. Yields initially went up since the governor said “50 basis points might be excessive”. Dealers wondered how would the market react if the next cut was 15 bps or for that matter 40 bps. Yes the move certainly gives flexibility to the MPC, but what if the flexibility leads to confusion. What if bankers told consumers their home loans would be fixed at 17.7 percent over MCLR and the MCLR itself was worked out at 8.07 percent. If 25 bps is not sacred why only 35 bps, why not 36 bps? Why not 34 bps? And how should each of these be interpreted. The jury is out.