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Column: The big bang RBI stimulus – Behind Infra Lines

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The slew of announcements by the Reserve Bank of India (RBI) to lower the repo rate, reverse repo rate, cash reserve ratio and allowing financial institutions the bandwidth to offer a three month EMI moratorium are all much needed and welcome as India grapples with an unprecedented but much-needed shut down due to the global coronavirus pandemic. The RBI stimulus has hit at the most crucial issue at hand, i.e. “lack of or in most cases absence of cashflows”. Helping individuals and businesses tide over temporary cash flow issues will be critical to ensure that as and when the economy recovers and demand picks up, businesses can move (if not bounce) back to normalcy.

The biggest challenge is the stoppage in cash movement due to the shutdown. As businesses stop selling and the wheels of the economic system stop turning one gets a chain reaction through low to no sales, thereby impacting a firm’s capacity to invest, pay back debt and pay employees. As both firms and individuals are hindered, excess liquidity in the system due to the RBI policy changes allows lenders to both ease the credit constraints as well as lower the cost of credit. Flexibility around credit repayments and a lower price of credit through greater liquidity in the financial system will boost the economy to cope with the crisis and eventually recover.

We may underscore that the issues faced by borrowers are more a liquidity issue and going forward also an issue of lagged demand growth. The coronavirus driven shutdown has led to a sudden stop in demand. A lot of even high-quality businesses may be severely constrained. The vital aspect to note is that those businesses which remain high-quality are negatively impacted by an exogenous shock that has rendered their current cashflows insufficient to cover their costs, debt servicing and employee payrolls. The RBI policy changes carefully address this “liquidity issue” that is at the forefront of the problems.

Additionally, the RBI policy changes through increasing liquidity and providing banks with the option of offering a moratorium on EMI payments, at once, recognises that while demand drop was a “jump event” with a sudden drop in demand, the recovery in demand will be more of a “trickle incremental event” once the shutdown ends, and the pandemic subsides. The increase in demand may be more gradual vis-Ã -vis a sudden drop. Policies that allow a lower cost of credit, higher availability of credit and flexibility around loan structuring will assist both lenders and borrowers better to match their credit cashflows with the business cashflows.

The RBI announcement on the targeted long term repo operation (LTRO) is one that is also vital in high volatility and low liquidity situation. The RBI’s decision to offer banks capital provided the money is invested in investment-grade corporate bonds will, to some extent, help ease the pressure on the spread widening and low liquidity seen in the corporate bond market. The LTRO announcement shows that there is a realisation that all selling in the markets isn’t necessarily a view on the fundamental value of the asset under consideration but is also driven by technical liquidity and portfolio allocation factors, especially in times of crisis. Primarily, market participants sell since they need the cash to tide over current issues as opposed to selling based on asset value. The LTRO, if used by the banks, can, to some extent, help support the corporate bond market.

At a broader level, the recent policy changes of the RBI have created a framework for releasing liquidity into the financial system to absorb the corona virus shocks better. The ability of market participants to realise that while the current problems are grave, the need to restructure credit agreements around cashflows is critical for both lenders and borrowers. The RBI policy announcements have provided the market with the tools with which to manage the cash flow mismatches to tide over current issues to some extent.

Essentially, while specific human behaviour patterns might change, people will still fly on planes, eat out at restaurants and stay at hotels. Short-term exogenous shocks, however large, won’t change the fundamental nature of businesses in the medium to long-run. The RBI through both policy and signalling has shown the will to support the markets quite actively to help move forward.

(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an advisory firm. You can contact him at [email protected] or @Taponeel on Twitter)

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Covid-19 corollaries on the dairy sector: CRISIL

Overall, demand for milk and dairy products would be lukewarm in the near term, so prices are unlikely to boil over, according to the report.

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New Delhi, May 26 : Supply chain disruptions in the early weeks of the nationwide lockdown, and bread-and-butter issues for hotels, restaurants and cafes, have materially reduced demand for dairy products.

This is despite supply of most dairy products continuing during the lockdown, since they are categorised as essentials.

The shuttering of hotels and dine-ins has also dried up off-take of skimmed milk powder and khoya.

According to report by CRISIL Research on the state of dairy industry and supply chains, products that can’t be made at home easily – such as cheese, flavoured milk and also khoya – haven’t found their way back to the dining table in the same quantities as before the lockdown.

Demand for ice creams, which usually peaks in summer (accounting for 40 per cent of annual sales) has just melted away. Rural areas, which are feeling the income pinch more, seem to be staying off butter and ghee, the report by global analytics firm has said.

To be sure, since the third week of April, supply chains have turned smoother, so demand for staples such as milk, curd, paneer and yogurt are expected to see a quick rebound, leading to on-year expansion in sales, CRISIL said.

The pandemic, however, may sour the business for unorganised dairies because of pervasive contamination fears.

Conversely, as consumers shift, revenues of organised dairies and packaged products should fatten.

Overall, demand for milk and dairy products would be lukewarm in the near term, so prices are unlikely to boil over, according to the report.

Large brands such as Amul and Mother Dairy had already hiked retail milk prices by 4-5 per cent last fiscal. They may not serve an encore.

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445 people died from Australia bushfires smoke: Experts

Melbourne, Sydney and Canberra all had periods where they had the worst air quality in the world as a result of the smoke.

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Canberra, May 26 : Smoke from Australia’s devastating 2019-20 bushfires killed at least 445 people, health experts revealed on Tuesday.

Fay Johnston, a public health expert from the Menzies Institute for Medical Research at the University of Tasmania, told the bushfire royal commission on Tuesday that her team estimated that 445 people died as a result of the smoke that blanketed much of the nation’s east coast, reports Xinhua news agency.

It takes the total death toll from the 2019-2020 bushfire season, which has been dubbed the “Black Summer”, to nearly 480 after 34 people lost their lives directly.

According to modelling produced by Johnston and her colleagues, 80 per cent of Australians were affected by the smoke at some point, including 3,340 people who were hospitalized with heart and lung problems.

“We were able to work out a yearly cost of bushfire smoke for each summer season and… our estimates for the last season were A$2 billion in health costs,” Johnston said.

“There’s fluctuation year to year, of course, but that was a major departure from anything we had seen in the previous 20 years.”

Melbourne, Sydney and Canberra all had periods where they had the worst air quality in the world as a result of the smoke.

Commissioners also heard on Tuesday that the increasing frequency of significant bushfire events in Australia meant that survivors no longer feel safe during the recovery phase.

“Disasters are no longer perceived as rare events, they are often seen as climate change, and they’re part of our new reality,” Lisa Gibbs, a child welfare expert from the University of Melbourne, said.

“We don’t know how that is going to affect recovery because the seeds of hope are a really important part of people’s ability to deal with what has happened and to get back on track.”

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Rising urbanization likely cause of heavy rainfall in South: Research

Their findings were reported in the ‘Quarterly Journal of Royal Meteorological Society’ on May 18, 2020.

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Hyderabad, May 26 : A team of researchers at the University of Hyderabad (UoH) have discovered a link between heavy rainfall in several parts of south India and a growing urbanisation in the region.

A team led by Prof. Karumuri Ashok from the Centre for Earth, Ocean and Atmospheric Sciences of the University of Hyderabad, examined whether a common factor, the changing ‘land use land cover’ (LULC) in these states, has any implications for the heavy rainfall events.

Over the past few years, many heavy rainfall events have been reported in cities of south India. Prominent among them are the extreme rainfall that created havoc in Chennai and nearby areas of Tamil Nadu in December 2015, the heavy rainfall over Hyderabad and adjoining regions in Telangana in September 2016, and the extreme rainfall event in Kerala in August 2018.

Notably, these three states differ in their geographical locations, and also the season in which they receive rainfall. Kerala, located on the southwest Indian coast off the Arabian Sea receives heavy rainfall during the summer monsoon from June-September.

Tamil Nadu, off the Bay of Bengal, receives rainfall mainly during the northeast monsoon (October-December). The land-locked state Telangana receives the bulk of its annual rainfall during the summer monsoon season.

A UoH statement stated that their study showed the precipitation during heavy rainfall events in these states has significantly increased from 2000 to 2017. Using the LULC data from ISRO, and by conducting 2 km resolution simulation experiments of twelve heavy rainfall events over the states, the researchers found distinct LULC changes in these three states, which led to higher surface temperatures and a deeper and moist boundary layer. These in turn caused a relatively higher convective available potential energy and, consequently, heavier rainfall.

The study also suggests that increasing urbanization in Telangana and Tamil Nadu is likely to enhance the rainfall during the heavy rainfall events by 20%-25%. Prof. Ashok feels that improving the density of observational rainfall and other weather parameters may help in forecasting extreme rainfalls at city level.

Their findings were reported in the ‘Quarterly Journal of Royal Meteorological Society’ on May 18, 2020.

Prof. K. Ashok and his Ph.D. student Mr. A. Boyaj who is the first author, are both from the Centre for Earth, Ocean and Atmospheric Sciences of the University of Hyderabad. The work was done in collaboration with Prof. Ibrahim Hoteit and Dr Hari Prasad Dasari of King Abdullah University of Science and Technology (KAUST), Saudi Arabia.

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