The pandemic-led prolonged and severe disruption has hit the economic growth and may result in higher non-performing assets and capital erosion of banks. This has made another recapitalisation of the banking sector inevitable, experts feel.

In the five years from FY16-FY20, there has already been an estimated Rs 3.08 lakh crore capital infusion in the public sector banks, brokerage CLSA noted.

The brokerage expects that the recovery prospects of the banking sector would be complicated and a fiscal and public debt position that was (beyond) fully-stretched.

In order to facilitate the next credit and investment cycle, it feels that along with recapitalisation of the banking sector, low interest rates (optimally negative in real terms) will be needed.

Further, weak macroeconomic data also indicated of the anticipated steep GDP contraction in Q2CY2020. While the industrial production index did rebound to 88.4 in May from 53.6 in April, the average April-May output level was down by 42 percent from Q1CY2020.

The money supply growth (broad M3) expanded by 12.3 percent YoY in June. "This is a reflection of the RBI’s aggregate liquidity measures since February 2020 at an estimated Rs 9.57 lakh crore, equivalent to 4.7 percent of nominal GDP (FY20). However, this failed to lift bank credit growth which remained at 6.3 percent YoY in June," CLSA noted.

Meanwhile, concerns over financing crunch faced by the NBFCs and HFCs were addressed by the Reserve Bank of India (RBI). The RBI also recognised that post-COVID recovery efforts will be complicated by the need to unwind countercyclical regulatory measures.

According to CLSA, recovery prospects would be strengthened by lower interest rates. The build-up in foreign reserves, up $35.4 billion in Q2CY20 to $513.3 billion along with falling headline CPI inflation provides flexibility for further easing.

The RBI had cut repo rate by 135 bps in 2019 and 115 bps since the onset of COVID to 4 percent.

"While keeping mum, the RBI is likely considering further cuts. Implicit in governor Das’ comments, post-COVID recovery will be prolonged by the pre-existing financial crisis. This underlines our forecast for another 125 bps cut to 2.75 percent by the end of the fiscal year in March 2021," CLSA said.