Reserve Bank of India acts fast; steps welcome

The Reserve Bank of India (RBI) acted with alacrity when it announced a slew of measures on Friday to deal with the economic fallout of the COVID-19 outbreak on the economy. The government had announced a set of measures the previous day but both addressed different aspects of the challenge. The government’s measures were considered to have been late by some days and they could have been better designed. But the RBI advanced the meeting of its Monetary Policy Committee (MPC) by a week to take a decision on the package and finalise it in view of the fast-changing situation. The highlights of the package are measures to sustain and increase liquidity in the system, policy rate changes, enhancement of the flow of credit and a moratorium on the repayment of long duration loans. This is in response to the demands from industry and business for immediate relief on credit availability and repayment obligations. Most individuals would also find repayment of personal and other loans difficult in the coming months.

Banks and financial institutions were allowed a three-month moratorium on loan repayments and reclassification of stressed loans as non-performing assets (NPA). This will provide relief to firms and individuals who are under pressure as incomes and revenues have reduced because of the lockdown. The repo rate has been cut by 75 basis points to 4.4%. This is a major reduction and it has taken the rate to the 2009 levels, but is warranted by the economic disruption, prospect of a sharp fall in growth and a rise in inflation. The cut in the reverse repo rate will discourage banks from parking their funds with the RBI and may incentivise them to lend more. They have often been accused of being lazy and reluctant to lend by playing safe for fear of a rise in the NPAs. But the benefit will mostly be psychological because businesses are not ready to borrow, though there have been complaints about lower credit flow. It is unlikely that the situation will change in the near future. The RBI has resorted to a huge liquidity enhancement programme amounting to almost 3.4% of the GDP, but it should be ensured that the liquidity thus injected into the system reaches all sections of the economy.

The measures announced by the RBI may be the most needed in the present situation. The reach and gravity of the disruption will only become clear in the coming days and weeks, and more such measures may be needed then. It is difficult to make a guess also, because the situation is unprecedented and decisions and actions from the past may not provide any useful guidance.