Key RBI steps to ease stress

The Reserve Bank of India’s (RBI) announcement of a number of measures to ease the financial stress in the economy and to support its most needy segments was timely. The economy showed signs of revival early this year after it was in dire straits through most of last year. But the second wave of the pandemic which is sweeping across the country may have put paid to the hopes of a steady revival. Estimates for the economy are being lowered and the need for supportive measures is increasing. However, the scope and available resources for support are shrinking, and that is why the RBI’s steps are important. The measures are designed to support the sectors which are most impacted by the pandemic, and there is a special focus on the health sector. Small borrowers in the informal sector, micro enterprises and self-employed persons who are likely to be badly hit by the localised lockdowns will also be benefited by the measures.

An on-tap liquidity window has been provided to the banks which can borrow Rs 50,000 crore at the repo rate for lending to the healthcare sector. This will benefit vaccine manufacturers, suppliers of medical devices, oxygen and ventilators and hospitals, among others. These loans will also be classified as priority sector lending. Credit to small businesses and retail borrowers will be incentivised. Banks will be offered 40 basis points higher than the reverse repo rate for surplus liquidity up to the size of the Covid book. This will help increase funding for the health sector at a lower cost. There are quite a few other measures which together form an aid and incentivisation package covering most players in the financial sector and beneficiaries in various sectors. The overdraft limits of state governments have also been eased, giving them greater access to funds to meet their higher expenditure needs. The number of days states can be in overdraft has been increased to give them greater room to manage their borrowings.

While the RBI has done well to take these measures, its assessment of the impact of the pandemic does not seem to be very realistic. It thinks that the decline in aggregate demand caused by the second wave is moderate. This may be based on the present situation, which many fear may worsen in the coming weeks. It may have to come up with more measures, much as it announced its rescue packages in tranches last year. The government has not announced any measures of its own except the decision to provide some food grains to the poor under the Pradhan Mantri Garib Kalyan Anna Yojna for two months. It should do more than that before it is too late.