The near term condition in the credit market would be cautiously optimistic as interest rates are likely to stabilise at the current level and currency may undergo structural changes in the coming months, according to a recent report by India Ratings and Research (Ind-Ra). A culmination of the rising growth-inflation dichotomy along with a sustained improvement in the balance of payment account will become crucial determinants for ensuring ultra-loose monetary policy conditions by the Reserve Bank of India (RBI). Amid the COVID-19 outbreak, abundant liquidity in debt capital markets has played a major role in alleviating excessive risk version sentiments and common funding challenges prominent during the crisis time.
The central bank has taken various steps to encourage banks to lend to entities in need and mitigate the impact of cash losses during the lockdown. This was further aided by the regulatory forbearances and targeted fiscal support. Though the access to capital and bank credit was largely concentrated among few top-rated borrowers during the initial months, the access to capital for lower-rated borrowers has improved recently.
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According to Ind-Ra, the debt capital markets will remain conducive for AAA and AA category borrowers. However, the economic damage due to COVID-19 needs to be examined and monitored. A fragile and two-track recovery both at the macro and micro levels would keep the financial condition unstable. In this regard, benign monetary policy conditions could act as an enabling factor, and for broad-based recovery on a sustained basis, a combination of massive private as well as complementary public spending is necessary.
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The dynamics of global trade conditions will remain fluid, amid the pandemic crisis. The US economy is undergoing changes. Also, policymakers in the South East Asian countries are actively engaging in attracting a portion of manufacturing base to the respective countries. Monetary policy conditions have also undergone massive changes by massive quantitative easing through various means. In view of these structural changes in the trade, capital, and contour of monetary policy, the currency may find a new normal in the medium term, followed by a bout of volatility in the short term.
The buoyant capital market and attractive rates will continue to garner borrowers' interest to shift away from the conventional banking system to capital markets, especially for the short-term funding requirement. Due to COVID-19, both large banks and large non-banking finance companies have raised capital.
On the other hand, system liquidity has been increased to abundant, i.e., around 5 per cent of net demand and time liabilities, from adequate (1 per cent). So, the liability side of financial institutions, especially for large entities, has been reinvigorated. This will be conducive for recovery, subject to stability at both the external and domestic credit spaces.
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