India Has More Policy Space On The Monetary Side, Says Finance Ministry Adviser Sanjeev Sanyal

India’s promised Rs 20 lakh crore economic package has to be designed while keeping in the mind the immediate needs but also the available policy space. And a lot of that space may lie in the realm of monetary policy.

That’s according to Sanjeev Sanyal, principal economic adviser to India’s Finance Ministry, who believes India will have to use the resources available to it. “When we talk about an economic package, it is a mix of monetary and fiscal in every country depending on the space they have. Our space is much larger on the monetary side so we are utilising that,” he said in an interview to BloombergQuint.

Partially detailing Modi’s economic package, Finance Minister Nirmala Sitharaman yesterday revealed 16 measures ranging from guaranteed credit for small businesses to funds earmarked for purchasing debt securities issued by non-bank lenders who serve small businesses and low income consumers. Ahead of the government’s announcements, the central bank has announced a series of steps to infuse liquidity into the financial system.

Will monetary and financial sector measures make up a bulk of the promised Rs 20 lakh crore economic package?

Sanyal clarifies that the government will utilise whatever fiscal space it has and suggests that upcoming announcements will lead to some clarity. For now, the government is trying to ensure that immediate cash-flow disruptions faced by small businesses are tackled.

As part of its plan, the government will provide a 100 percent guarantee to small business loans up to an additional 20 percent of their existing credit facilities. The comfort of this government guarantee will help lenders provide the additional support needed. The government has also designed equity support facilities.

“Putting a 100 percent guarantee to a quantum of Rs 3 lakh crore is not trivial. We have also targeted loans to the edges of those who are considered 'good credit',” Sanyal said.

In addition, a special purpose vehicle will buy up to Rs 30,000 crore in investment grade debt securities issued by non-bank lenders to ensure they have liquidity. Another Rs 45,000 crore fund has been earmarked for partial credit guarantees. This is being done to address the problem of credit “jamming up”, Sanyal said, adding that the impact of these announcement will be visible in yields on fixed income securities issued by these firms.

While none of this means that the government will not use resources at its disposal, an important part of the economic support package will come from the monetary side, Sanyal acknowledged.

Sanyal believes that market interest rates in India are still to high and the yield curve is to steep.

Despite the Reserve Bank of India cutting the reverse repo rate to 3.75 percent and the repo rate to 4.4 percent, the 10-year benchmark yield has remained close to 6 percent. The 10-year yield should ideally be close to 5 percent, Sanyal, who has spent many years working in the financial markets, said.

While RBI governor Shaktikanta Das has reiterated that a drop in inflation may allow rates to move lower, the repo rate is already at the lowest it has ever been in India. The reverse repo rate had fallen to 3.25 percent briefly during the financial crisis.

As such, is there much room for more rate cuts in India?

India needs to get rid of any preconceived notion of how low our interest rates should be, Sanyal said. The economic adviser pointed out that we need to do what is needed, at a time when developed countries have evolved to adopt zero interest rates or even negative interest rates as part of their policy toolkit.

“We have to allow the price of money to adjust to the times,” he said.

Last week, the government decided to raise its borrowings for the current financial year by more than 50 percent to Rs 12 lakh crore, without specifying the underlying growth and revenue assumptions being used to assess the government’s financing needs.

Sanyal said that while a number of projections made ahead of the Union Budget are no longer valid, in a fast changing environment, putting down growth and tax revenue estimates may not be appropriate.

For now, the bond markets are in a position to absorb the additional borrowings, said Sanyal, adding that too much is being made of the need for the central bank to monetise the government’s deficit. “After all, open market operations or reserve accumulation are all ways of monetising the deficit,” he said.