RBI waves its monetary tools2 min read . Updated: 22 May 2020, 12:07 PM IST
- It’s doing all it can with the few instruments it has, but these are turning blunt as our economy faces threats beyond the scope of monetary policy
In a surprise move, the Reserve Bank of India (RBI) on Friday announced a 40 basis points cut in its main policy rates, along with a slew of other targeted measures aimed at helping an economy battered by the covid crisis. With the latest cuts, the repo and reverse repo rates now stand at 4% and 3.35%, respectively. The latter rate, which is the interest RBI pays banks for parking their funds with it, has been in greater use of late. This is because there is excessive liquidity in the banking system—a lot of money coming in with very little being lent. Under such circumstances, it is the reverse repo that assumes importance. By cutting this rate, RBI is trying to dissuade banks from lending it their excess funds, in the hope that they will extend loans to their business clients and retail customers instead, a way to aid economic activity.
It remains doubtful, however, that lenders will take RBI’s cue. Demand for loans at this point is very low, and this may be the case until there is a broader pickup in the economy, which, unfortunately, looks distant at the moment. Even if borrowers do show up, banks may not loan them money all that easily. The risk aversion that has prevailed among bankers cannot change overnight. While the government has declared a guarantee for loan extensions to small businesses, this will probably take effect only once loan approvers are fully assured in writing that they will not bear any penalties for defaults. The sooner the paper documentation of this scheme is done, the better.
As a relief measure, RBI also extended by another three months—till 31 August—a moratorium on loan repayments in the wake of the covid crisis. Also, those who avail of the offer will not need to pay the held-back money immediately once the period is over. This should prevent a pile-up of dues, which could have caused borrowers financial stress. They will now be permitted to convert such dues into term loans repayable by March 2021. As before, the interest charge ticker will not stop. So their burden will be significant. The central bank made a few other moves as well, all aimed at mitigating the impact of the current crisis. With the pain showing no signs of abating, the central bank needed to show it was doing all it can, even though there are obvious limits on what can be achieved through monetary measures. Perhaps the rate cuts will lift sentiment and help keep yields down in a bond market that remains troubled by lack of clarity on the Centre’s fiscal deficit this year, and thus uncertainty on inflation and the real price of money in India.