RBI’s robust measures may salvage the economic situation

The relief measures have all the ingredients to act as an economic troubleshooter for salvaging Indian economic slump amidst world recession.

Apr 03, 2020 02:04 IST India Infoline News Service

India’s war against Covid-19 pandemic found a new strong arsenal on the economic front in the form of fresh liquidity infusion by unleashing strong fiscal measures announced by the Reserve Bank of India.

In any war, the timing, and strategy is of crucial importance to win. We should hand it out to the RBI governor and Monitory Policy Committee (MPC) that at the crucial time when the Indian economy is battling the exponential contagion; the new liquidity in the system would certainly help to ease out the cash flow and debt pressure in the economic conundrum. On Friday, a day after the Union Finance minister, announced a Rs 1.7 lakh crore economic stimulus, to help out the unorganized workforce, the RBI too announced its own set of rate cuts and measures to ensure the ease of financial flow to corporate India.  

It has come up with measures to increase liquidity as also ease banking regulations has cut key rates and also announced a moratorium of three months of EMIs on all outstanding loans. Participants in the Indian economy could witness some relief in the near future, as these initiatives should take on the economic crisis due to the coronavirus pandemic.

As suggested by Shaktikanta Das, the RBI governor, these measures will boost liquidity and ensure smooth functioning of financial institutions, while the EMI moratorium will ensure no impact on credit ratings on loan repayments. It will largely benefit the startups and small entrepreneurs whose revenue inflows had stopped due to the uncertain economic situation.

The relief measures have all the ingredients to act as an economic troubleshooter for salvaging Indian economic slump amidst world recession.

Apart from infusing fresh liquidity of Rs. 3.74 lakh crore –the RBI has already infused Rs.1 trillion of liquidity through LTRO since February- what the announcement has managed to do is put fresh impetus and uplift the sentiments that have hit rock bottom. As the governor Das puts it and now at this threshold, I echo his sentiments that though Covid-19 is upon us, “but this too shall pass.”

Will the measures make it happen? 

The outcome of these measures will be felt in the time to come, however, the RBI initiatives has taken care of all concerns of the  banking system right from the increase in deployable funds by reducing Cash Reserve Ratio, additional liquidity through MSF, immediate delinquencies to taking care of the capital requirements of the corporate India by infusing more liquidity.

A 90 basis point cut in the reverse repo rate to the present 4 percent now should compel banks to lend more to all the adversely hit sectors.

The additional funding through the marginal standing facility (MSF) where banks can borrow overnight by dipping into the statutory liquidity ratio has also been increased to 3 percent from the earlier 2 percent.  That would relive the market for corporate papers. Moreover, forbearance is given that it would not be counted under large corporate exposures. Thus banks would now be encouraged to invest in those Papers.

Post Covid-19 scenario

The liquidity is adequately provided so banks can support the overall economy. But the real ground-level issues would start after 3 months. Bunching of repayments towards interest and EMIs would be difficult. That entire differed amount need to be amortized for at least one year or so, to ease out pressures at later dates.

The reduction in Repo rate would be transmitted with a lag of one or two quarters. By then the effects of COVID-19 may get reduced. So when fresh demands for credit or incremental credit starts after one or two quarters, the rate cuts would bring good relief for businesses as well as retail borrowers.

Conclusion

Considering today’s measures, the banks should start lending, especially Public sector Banks. The credit growth has come down to around 6% in last month. It was not due to liquidity crunch but rising NPAS, provisioning, depleting capital and fear of accountability. This fresh infusion of liquidity should be able to address these issues in due course. 

The masterstroke announcement by RBI will succeed only if these liquidity tools are quickly and efficiently transmitted down the line for India Inc. to augment the efforts towards the revival of the economy.

The author of this article is Dr. Niranjan Hiranandani, President, ASSOCHAM

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