On Friday, the governor of the Reserve Bank of India, Shaktikanta Das, announced a slew of measures to supplement government efforts to address the economic upheaval caused by the coronavirus. They follow a three-pronged approach: First, lowering the cost of capital; second, ensuring ample liquidity and a narrowing of the credit spreads of corporates; and third, providing a moratorium on instalments for three months on all term loans of retail and corporate borrowers. These were much needed measures and will help ease the financial burden, prevent credit market dislocation and keep credit channels working, and protect against defaults.
The benchmark repo rate has been cut by 75 basis points to 4.4 per cent, from 5.15 per cent earlier, in light of the unprecedented economic disruption, and the uncertain growth and inflation outlook — even the RBI has refused to provide any forecast on growth and inflation as on now. The reverse repo rate has also been cut, thereby disincentivising banks from parking their funds with the RBI, and prodding them to lend more to the broader economy. On the liquidity front, the measures are equally significant. The central bank has cut the cash reserve ratio by 100 basis points to 3 per cent. It has also announced targeted long-term repo operations of Rs 1 lakh crore. Liquidity availed through this route will have to be deployed in corporate bonds, commercial papers, and debentures. This will bring liquidity to the corporate bond market, and will lead to a fall in yields which have risen in the past few weeks, indicating market dislocation. But the amounts involved may not be enough, and will probably have to be expanded. Further, the challenge will be to ensure liquidity transmission to the larger economy, not just to investment grade companies. The three-month moratorium on instalments of all term loans is another welcome step as it will provide relief to all retail and corporate borrowers who are finding it difficult to service their loans. As is the deferment of interest on working capital, which will help businesses whose revenues will take a massive hit during the lockdown. Banks will also not have to classify these loans as non-performing.
This is uncharted territory. The extent of disruption can only be gauged once there is some certainty over the depth of the outbreak, its spread and duration. As the situation is rapidly evolving, policymakers will have to be mindful that more such measures will probably be needed. But, in stating that the RBI will not shy away from using both conventional and unconventional measures to address the economic crisis, Das has sent a strong message. Efforts of the central bank will have to be supplemented by more fiscal measures as the economic distress continues. The expansion of the scope and size of cash transfers, and more targeted interventions for stressed sectors, especially the unorganised/informal parts of the economy, should be considered.
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