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Sunday, April 11, 2021

No stone will be left unturned to revive Indian Economy: RBI

In a fresh round of efforts to boost the Indian economy, Shashikanta Das, Governor RBI announced a series of measures ranging from easing the liquidity to increase in the ways and means of advances. Through these announcements, RBI tried to demonstrate that no stone will be left unturned to revive the economy.

During his second media briefing in third week of April 2020, RBI governor asserted that India had shown a growth rate of 7.4% in 2020-21 before March and the Corona outbreak. Sounding highly positive, he remarks that India is among a few G-20 countries who has come out strong. With a growth rate of 1.9% it stands apart.

The IMF is working on various reshaped recoveries. It projects a global GDP close to 9%. He expects India to show a sharp V-shaped recovery. India will resume growing to 7.4% which was pre-COVID and pre-recession growth.


RBI made announcements to revive Indian economy
Blue NDMC street board for Reserve Bank of India (RBI) building in Delhi, India India’s central bank, which controls the issue and supply of the Indian rupee Photo: shutterstock.com/PhotographerIncognito

But how is RBI going to achieve this? Will RBI strike the right deal?

RBI has cautiously announced some thoughtful monetary measures. In order to enable enough liquidity to small, mid-sized Non Banking Finance companies(NBFCs), a Rs. 50,000 crore dose will be given via Long-term repo operations (LTRO). This means that RBI will be cutting down the reverse repo rate from 4 to 3.75 %. What does this mean? It simply means that RBI will encourage the banks to lend more funds than positioning them in RBI.

What other measures are in store for India?

Along with the reverse repo rate down a Rs. 50,000  crore shot of immunization will be distributed among financial institutions like NABARD, SIDBI and NHB. Also there will be an increase in the ways and means of advances (WMAs). A limit of 60 % will provide more flexibility of borrowing to the states at the same time ensuring no bunching of the borrowings.

Then comes the regulatory measures from the RBI. A three-month moratorium period on loans. The banks won’t be counting 90 days from March 1, 2020 to May 31, 2020 from the past due while keeping a provision of 10% with a condition to reverse the same.

The governor has also asked the scheduled commercial banks and co-operative banks against declaring dividend till September 2020, just to conserve some capital for challenging times.

RBI has also realigned the date of commencement of commercial operations thus providing a relief to NBFCs and stop the projects from becoming non-performing.

Backed-up with these RBI measures, India has shown it’s strength by standing tall even before the measures were announced. It leads us to an absorbing insight as to what is the base of India’s strength.

Why does India have less to worry?

India has a lot of positive aspects to look into. Believe it or not, but before the pandemic we were not confident of our own resources.

For example, look at our agricultural sector.

It has proved to be a backbone of the country and even in the hardest hit situation we can bank on it. During the lockdown the FCI had assured us of having enough food supply. Now with the beginning of the Kharif crop season, it is expected a 37% increase in the production of rice. The IMD has further forecast a normal monsoon on April 15. With the sowing in full swing, accelerated production of fertilizers and a healthy sale of 21.3%  in the tractor sales is a good sign as against a contraction of 0.5% in April-February last year. However, a slight upset may arise due to workers shortage post lockdown.

Other sectors:

Looking on the brighter side of the foreign exchange reserves, India has enough Forex reserves to last for 11.8 months of imports kept in good shape at $476.5 billion. This strong scenario shadows the severe contraction of 34.6% in exports during March 2020 given the global crisis.

What’s more? Well, the index of industrial output (IIP) has shown the highest rate not being seized by the corona impact. Furthermore, there are all the chances for the inflation to come down to somewhere below the targeted 4% if the supply chains are restored.

A beneficial space is thus created for making apt policies to enhance financial stability. RBI has to take some wise calls. It is planning to inject Rs. 25,000 crore in the economy.

RBI announces measures to support liquidity
Worker repairs textile machine in small factory. Photo: shutterstock.com/paul prescott

Will the RBI’s injection cure the slumping economy or is it afraid of accommodating itself too much with new monetary measures?

The truth is that RBI is indeed going to inject Rs. 25,000 crores by way of the fourth tranche to the Targeted long-term repo operation (TLTRO) with a condition to utilize these funds within 30 days from the date of operation.

How is TLTRO helpful to the banks?

To understand the RBI’s move better, certain areas need to be comprehended. The maximum amount, which a bank can invest in the securities under the TLTRO, after the allotment received, is limited to 10%. The liquidity which is availed by the banks has to be utilized in various types of investments within 30 days. Banks are required to make 50% investments in eligible instruments from the primary market and the rest 50% from the secondary market including mutual funds and NBFCs.

With the air cleared, the banks getting liquidity and the markets at a bit of ease, the reactions to these new monetary measures from RBI are of paramount importance.

What is the response towards these new measures?

The market response, to these second set of measures, from RBI is very positive. The reasons for such a welcome were:

  • Banks will have 180 days to declare an account a non-performing asset.
  • Realignment of targeted operations benefiting the finance companies, agriculture and MSMEs.
  • Decision to cut the reverse repo rate empowering the banks to lend more.
  • Enhancing of the WMAs with a 60% provision to states enabling them to borrow more short-term funds to fulfill their expenses.

With these measures, RBI has charged the liquidity by 3.4%of the GDP with an anticipation that this figure will further rise due to the positive market response. The Hindu is all praises for the RBI by stating that RBI has infused oxygen into the financial system. ‘Liquidity’, the lifeblood of the economy, is thus maintained making it easier for banks and NBFCs. A constant feedback will help the bank in fine-tuning its moves.

Talking about feed backs, RBI has till date received one positive and one negative feedback.

A positive slashing of reverse repo rate to discourage the ‘Lazy Banking’ phenomenon

A surprisingly praiseworthy decision of RBI to cut down on the reverse repo rate – says Vivek Nair at The Telegraph. As a consequence to cutting down of the reverse repo rate, the ‘Lazy Banking’ by the banks has gone down. Banks, when bad loans become unaffordable, tend to deposit or lend money to risk-prone debt-laden commercial buyers to earn more interest. However, the money will now flow to more productive sectors of the economy, slowly bringing them back to life.

A negative tranche to TLTRO

A not-so-good news says Mythili Bhusnurmath at The Economic Times. She opines that this re-financing of Rs. 50,000 crore to TLTRO is not a good idea as previously these sectors had not been benefited by them. Re-financing to NABARD , SIDBI and NHB with sub-limits for each of them are inadequate. SIDBI, for example, has been ear-marked Rs. 15,000 crores, when it’s MSME sector has undergone most of the lockdown impact.

What can we conclude from this?

Clearly RBI is afraid of doing too much concludes Bhasnurmath. RBI’s decision to settle for a modest reduction of 80% from 100% instead of the total elimination of the liquidity coverage ratio is a skeptical decision. However, the banks in India have maintained a CRR of 3% and an SLR of 18%, questioning the need for a liquidity coverage ratio.

RBI, in its efforts to fight against COVID-19, has indeed tried to pull the stops with its new reliefs. Its now the government’s turn to boost the nation against the crisis.

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