Tag: Sanjay Mathur

Raghuram Rajan, BFSI News, ET BFSI

Banking & Finance

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NEW DELHI: The term ‘Quantitative Easing’ became widely known in financial markets during the last Global Financial Crisis of 2008. Former RBI governor Raghuram Rajan, who famously predicted that particular collapse, has recently warned about the risks associated with excessive largesse from central banks.

In a recent article, Rajan flagged the potential pain that global financial markets might see when central banks turn off the easy money tap.

The world over, government debt is rising exponentially and more worryingly, an increasing amount of the debt maturity profile is skewed through issuance of longer-dated securities.

Political dispensations typically look past long-term debt, as the exigencies of democratic politics may ensure that a successive administration has to bear the burden of earlier borrowings.

“…What if interest rates start moving up as inflation takes hold? If government debt is around 125% of GDP, every percentage point increase in interest rates would translate into a 1.25 percentage point increase in the annual fiscal deficit as a share of GDP,” the RBI ex-governor wrote.

SHORT-TERM EXPOSURE
Rajan specifically warned about the risks that economies are exposing themselves to on account of the inevitability of interest rate hikes.

“When the central bank hoovers up five-year government debt from the market in its monthly bond-buying program, it finances those purchases by borrowing overnight reserves from commercial banks on which it pays interest… QE thus drives a continuous shortening of effective government debt maturity and a corresponding increase in (consolidated) government and central bank exposure to rising interest rates,” he wrote.

LESSON FOR INDIA?
India’s public debt profile worsened significantly well before the pandemic. Government debt, which till three years back used to be confined to Rs 6 lakh crore on a gross basis, has risen by around 80% over the last 2-3 years.

This financial year, the government has announced a gross borrowing programme of Rs 12.06 lakh crore. When interest rates rise, as they must at some point, the shock to banks’ profit margins could be huge after this degree of exposure.

In recent chats with ETMarkets.com, some leading economists have flagged the issues emanating from such elevated levels of public indebtedness.

“Scenarios where debt-to-GDP becomes a problem can always emerge, especially if nominal GDP growth is not close to double digits. However, as of now, our baseline view is that general government debt-to-GDP is close to 88-90%, but it is unlikely to become a concern for the rating agencies, because we expect a gradual downward trend after two to three years,” Standard Chartered Bank’s head of economic research Anubhuti Sahay said.

“… with public debt at close to 90% of GDP, fiscal headroom to deal with another wave is now further compromised. And then, there is not a whole lot that additional monetary accommodation can achieve,” ANZ Bank’s Chief Economist for South East Asia and India Sanjay Mathur said.

Raghuram Rajan perhaps reserved the most hard-hitting part of his recent note for the last paragraph.

“As for the US, not only is the outstanding government debt much shorter in maturity than that of the UK, the Fed already owns one-quarter of it,” he wrote.



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ANZ Bank’s Mathur, BFSI News, ET BFSI

Banking & Finance

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NEW DELHI: The Governor of the Reserve Bank of India, Shaktikanta Das, said last year that the Covid-19 crisis is the sort of event that occurs once every 100 years. Policymakers from North Block to Mint Street have been attempting to find an adequate response to a crisis of this magnitude.

The Chief Economist, South East Asia and India at ANZ Bank, has a contrarian view.

In a chat with ETMarkets.com, Sanjay Mathur, a veteran economist, said the need of the hour is not capital spending that generates long-term gains. “Rather, what is important now and for years to come, is to lift people out of poverty, as that would have a larger impact on the economy,” he said.

“Let me take a controversial stand here. Our thinking on the fiscal has become somewhat stereotyped – capital spending is good and revenue spending is bad. And for FY22, the focus has been on capital spending. But the nature of the current crisis is different: it is a humanitarian crisis that calls for more massive welfare measures. A large section of our population has slipped into poverty, income and wealth disparities are rising,” Mathur said.

The government and RBI have unveiled various spending schemes since the pandemic struck last year; the flagship programme being the ‘Atmanirbhar Bharat’ scheme, which essentially prioritises import substitution.

However, out of the Rs 20 lakh crore announced by Prime Minister Narendra Modi, the actual fiscal outgo is very small. A bulk of the programmes are reflective of RBI’s liquidity infusion in the banking system, while the rest are mostly credit guarantees.

One cannot exactly blame the government, as its finances have been under strain since well before the pandemic.

In the last Budget, the government put aside the prescriptions of the Fiscal Responsibility and Budget Management Act and announced a fiscal deficit of 6.8 per cent of GDP for this financial year. The Centre had earlier set a target of 3.0 per cent fiscal deficit by 2017-18 (Apr-Mar).

However, it will not be accurate to say that the entire strain was on account of the pandemic. A year before Covid-19 wreaked havoc on the economy, the government had already skipped the targets it had set for itself under the FRBM Act, as tax collections fell short of targets.

Mathur said the government and the central bank together have done what they could within their constraints. “There was very little fiscal headroom to start with,” he said.

“So while I do acknowledge that asset creation has a larger multiplier on growth, this crisis is also unique and requires a different response,” he added.



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