Exiting The Easy Money Circle
More than a decade after the global financial crisis, the exit from an ultra-loose monetary policy — such as near-zero interest rates and helicopter money — in the US is still a work in progress. The US Federal Reserve’s balance sheet has expanded from under $1 trillion before 2008 to $4.5 trillion in the aftermath of the financial meltdown. The Covid outbreak has further pushed the unwinding as the Fed’s balance sheet is expected to jump to 50 per cent of the country’s GDP from the current 34 per cent. The eventual exit would mean liquidity tightening and higher interest rates in the US, which would have implications for emerging markets, including India, by way of dollar outflows from stock market and currency depreciation.
The Reserve Bank of India (RBI), too, gave regulatory forbearance to banks post the financial crisis. It followed an extended period of loan-restructuring relaxations without classifying stressed loans as non-performing assets (NPAs). This created huge hidden stress in the banking system in the last decade by way of under-reporting of NPAs, lower provisioning, over-stating of profits and capital levels, and encouraging zombie lending (the practice of providing credit to entities that do not have the capability to repay). A delayed exit from forbearance, after almost seven years of the crisis, saw NPAs rising to a high of 11.5 per cent by March 2018, and led to losses in banks’ books, depleting capital levels and companies defaulting on loan obligations. The Indian banking system, which is still to come out of 2008 shock, has entered the new crisis with very weak financials. Former Chief Economic Advisor Arvind Subramanian once described Indian policymakers’ predicament as Mahabharata’s chakravyuha challenge — ‘the ability to enter but not exit’.
Once again, governments and regulators world over are caught in a — This time the question is how and when to exit? “The size and scale of monetary
