Growth Push in the Pandemic : An analysis of RBI's policy measures for the slowdown.

Growth Push in the Pandemic :

An analysis of RBI's policy measures for the slowdown.

Devika. J

The Covid-19 pandemic has drawn the plugs off the economy too. The Indian economy's journey to recession has been accelerated, thanks to the pandemic. This is the time when people look to authorities and other decision makers to deliver a wholesome effort to alleviate their impending struggles.

The Reserve Bank of India, the central bank of the country, has come up with a slew of measures to salvage growth in the financial year. In an unprecedented step, RBI has accepted that growth rates will slip into negative this financial year, and has shifted its focus from rigorous inflation targeting to a sharp focus on salvaging growth.

This article is an amateur economics enthusiast's analysis of RBI's policy measures for the economy in crisis.

The focus of RBI's approach seems to centre around ensuring liquidity, mostly for businesses and entrepreneurs, by ensuring availability of liquid cash through measures like open market operations, among others.

The various measures that were undertaken are :

• Banks:
• Reverse repo rate cut by 25 basis points, thereby reducing the incentive for commercial banks to deposit money with RBI and ensuring availability of liquid cash with them.
• Relaxation of asset classification norms, for Non Performing Assets (NPAs).
• Repo rate cut by 75 basis points, thus reducing the interest burden on short term loans of commercial banks.
• Cash Reserve Ratio cut by 100 basis points, thus increasing cash availability.
• Capital conservation buffer, a prudential measure to meet the funds ratio of banks during adverse market conditions, need not be activated for a year.
• The State and Parallel Authorities:
• Targeted Long Term Refinancing Options (TLTROs) for Non Banking Financial Companies (NBFCs).
• Increased withdrawal limit under Ways and Means advances for states to avail short term funds, thus increasing money availability for transfers.
• ₹ 50,000 crores refinance facility for sectoral credit, for institutions like NABARD, SIDBI, and National Housing Board (NHB).
• Consumers:
• Moratorium on payment of instalments on term loans.
• Deferment of interest on working capital loans.
• Exporters :
• Export repatriation limit relaxed from 9 to 15 months to aid exporters during the transport restrictions.

Measures that target the supply side, like repo rate cuts, cash reserve ratio cuts etc. are not likely to yield expected outcomes as the risk appetite of banks and other lenders seems to be at an all time low. A major reason for this contraction of 'will to supply' can be elaborated as eroding producer confidence. Uncertainties of revival of demand, availability of labour, recovery of capital etc. invariably put investors in a muddle.

Measures targeting the supply side, majorly have a long term relevance. Its effect in the short term is not very visible, because it takes a certain period to materialise and create impact. Thus, boosting producer confidence or creating demand via fiscal measures, seem like possible short term measures to be undertaken.

This is where measures like Moratorium, targeting the demand side, or the consumers, become relevant. 

Moratorium is, essentially,  a repayment holiday, wherein a borrower can defer repayment of instalment or interest dues. This period effectively allows a borrower to postpone repayment of liabilities and help plan finances better during a crisis. Offered on personal and credit card loans, the moratorium facility was announced for three months, stretching from March 2020 to May 2020, but later, a second term was offered, from June 2020 to August 2020.

The objective of this measure is to maintain adequate liquidity, facilitate and incentivise bank credit flows, ease financial stress and enable normal functioning of markets, and is to be treated as a reprieve, not a waiver.

This is the major downside as concerns a moratorium- the interest accrues on the loan amounts, during the moratorium period, too. Effectively, borrowers who avail moratorium, end up paying extra interest to the bank.

Nevertheless, provision of additional liquidity through long term repos  and open market operations are the most feasible measures that can be undertaken, without compromising on the security of the future, in such a crisis situation. Measures like extensive credit policy  and equity infusion, direct lending et al., undertaken by the Federal Reserve of the USA is hardly feasible in India, given its population of the underprivileged. Direct transfer measures on a large scale poses a huge burden on the government's finances and also poses a real risk of inflation in the near future.

What can be the game changer, is targeted fiscal policies, to be undertaken by the government. Reducing tax burden on the common populace, is an efficient way of boosting incomes and thus, impacting demand. However, whether it is a feasible measure, given the government's financial position, is a worrying query.

RBI's tried and tested policy of liquidity infusion and easy availability seems the safe way forward, however whether it suffices is a probe into the dark. 

References: 

1. thehindubusinessline.com 

• All you wanted to know about moratorium period
• Covid-19: Can RBI mimic Fed's actions to bring the economy back on track.

2. economictimes.com

• The steps India has taken so far to contain economic fallout of Covid 19
• RBI announces more measures to deal with economic fallout of Covid 19.

3. indiatoday.in :

• RBI' s  Covid 19 booster shot : Is it enough to rescue Indian Economy from Coronavirus strike?

4. mondaq.com 

• Covid 19: RBI moratorium and creditor actions: some musings.

5. livemint.com

• RBI on Covid 19: From Inflation over growth to inflation and growth.