On Friday, Shaktikanta Das, governor of the Reserve Bank of India (RBI), unveiled another set of measures to address the financial and economic dislocation caused by the spread of the coronavirus. The latest announcements follow a four-pronged approach: First, ease the liquidity constraints being faced by parts of the financial system (non-banking financial companies and micro finance institutions); second, incentivise banks to boost credit flow; third, ease financial constraints being faced by state governments; and fourth, relax regulatory norms for banks and NBFCs.
To ensure that credit flows to all parts of the financial system, the central bank announced the second version of its targeted long-term repo operations, this time directed towards NBFCs and MFIs — flows from previous such operations were directed towards large corporates and public sector undertakings. This step is a clear indication of the RBI’s intention of directing credit flow to certain segments, to ensure that liquidity reaches the right pockets. Similarly, opening up a special refinance facility for NABARD, SIDBI and NHB will help facilitate credit flow to the agricultural sector, MSMEs as well as cash-strapped housing finance companies. The central bank has also lowered the reverse repo rate further, hoping that it will disincentivise banks from parking their surplus funds with it, thereby incentivising them to lend to the broader economy. However, as the previous cuts have not had much effect — banks parked Rs 6.9 lakh crore with the RBI on April 15 — the question is: Will risk-averse banks lend? It is likely that these measures will need to be followed by further cuts in the reverse repo rate and more LTRO to address banks’ risk aversion. Setting up a credit guarantee fund could also help facilitate credit flow, especially to MSMEs. On the regulatory side, banks have been provided further relief — the 90-day NPA classification norm will kick in only after the moratorium ends, while timelines for implementing resolution plans have been extended. NBFCs with exposure to commercial real estate have also been provided with some relaxations.
To ease the financial constraints being faced by state governments, the RBI has further increased the ways and means advances limit. While these limits may need to be raised further, given the disruption in their revenue streams, it does provide them with some breathing space. State governments can spread out their borrowing programme, which will help cool off the spreads from their recent highs. However, this is only a temporary facility and does not address the root cause of the problem — the collapse in government revenues. Towards the end of the announcements, the governor also provided forward guidance on the direction of monetary policy. He acknowledged that inflation was on a declining trend, and while there are likely to be supply side disruptions, inflation is expected to be well below the target of 4 per cent. This signals space for further interest rate cuts down the line.