Home / Opinion / Columns /  Time for RBI to start unwinding its easy-money pandemic policy
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In a meeting last week, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to continue with its accommodative monetary policy stance “as long as necessary". Defending the decision, RBI Governor Shaktikanta Das quoted Mahatma Gandhi and said “to lose patience is to lose the battle". Hence, the easy money policy unleashed by RBI to drive down interest rates will continue.

Due to this policy, RBI’s balance sheet has expanded by 51.4% in the last two years. In the two years prior to that, it had expanded by 26.1%. A bulk of this jump is on account of RBI owning 59% more rupee securities than it did two years back. Rupee securities primarily comprise bonds issued by the government to finance the fiscal deficit. RBI has decided to discontinue bond buying as of now, but at the same time will remain ready to print money and buy bonds if the situation so demands.

The central bank has been printing money and buying these bonds from financial institutions to pump more money into the financial system and push down interest rates. With cheaper loans available, the hope is that people will borrow and spend more, and businesses will borrow and expand. This will revive economic activity. This is how conventional monetary policy has been run worldwide since 2008, when the last major financial crisis began.

Further, as the debt manager of the government, RBI needs to make sure that the Centre can borrow at low rates of interest. As money printing has driven down rates, the central government’s average cost of borrowing in 2020-21 stood at just 5.8%, the lowest in 17 years. This increased to 6.1% between April and June 2021. This has helped the government, given that it needs to borrow close to 25 trillion between April 2020 and March 2022.

Nevertheless, it might be time for RBI to start going slow on its accommodative monetary policy. The government has had to borrow more due to a massive fall in tax collections. But things seem to be changing. The ministry of finance in a press release on 24 September pointed out that gross tax collections for the current financial year stood at 6.46 trillion, which was around 16.8% more than during the same period in 2019-20. This is primarily due to large and medium listed corporates having made massive profits by driving down costs. GST collections have also improved. On the flip side, many micro, small and medium enterprises continue to be in trouble.

Other than helping the government borrow at lower interest rates, the hope was that at lower interest rates, both the retail and corporate sectors will borrow more. Several news reports have pointed out that corporates have been paying off loans. Clearly, on the whole, they are not in the mood to borrow, and it’s not interest rates that are holding them back. Where capacity utilization continues to remain low, it doesn’t make sense for corporates to expand.

Further, bank retail loan growth is still in single digits. Again, it’s not interest rates that are holding people back from borrowing as much as RBI would like them to borrow. Their capacity to pay equal monthly instalments (EMIs) of repayment has gone down. This can be seen in the fact that two-wheeler sales in the country between April and August stood at just 4.99 million units, down 38% from 8.04 million units logged during the same period of 2019.

Also, demand for work under the Mahatma Gandhi National Employment Guarantee Scheme during July to September 2021 was almost similar to that between July to September 2020. This reveals a clear lack of job opportunities. All this clearly tells us that the economic situation of a large chunk of population isn’t cheerful. These are problems about which RBI cannot do anything.

In the meantime, low interest rates have created problems. Economist Madan Sabnavis, writing for Mint Views, has suggested that by lending at the interest rates they currently are, banks are mispricing capital, and this isn’t reflecting the actual cost of lending.

Further, low interest rates have a negative impact on consumption for those who depend on interest income to meet their expenses. This is something that RBI and most economists never seem to talk about.

Finally, lower interest rates have sent people in search of higher returns on their investments, taking stock prices to never-seen-before levels. The trouble is when asset bubbles burst, they typically destabilize the entire financial system.

As Governor Das wrote in the foreword to the Financial Stability Report released in January this year: “The disconnect between certain segments of financial markets and the real economy has been accentuating in recent times… Stretched valuations of financial assets pose risks to financial stability. Banks and financial intermediaries need to be cognisant of these risks and spillovers in an interconnected financial system." It’s one thing to acknowledge a problem and it’s quite another thing to not do anything about it.

Finally, the trouble with using quotes to justify decisions is that you can always find one. As Mahatma Gandhi once said: “It is unwise to be too sure of one’s own wisdom. It is healthy to be reminded that the strongest might weaken and the wisest might err." Now when will Governor Das say this?

Vivek Kaul is the author of ‘Bad Money’.

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