RBI’s moves need to be backed by equally bold fiscal measures
The rising toll of the pandemic on India’s economy and expectations that the country’s GDP will shrink seem to have forced the Reserve Bank of India to advance its scheduled monetary policy meet for the second time and announce deep cuts of 40 basis points in its benchmark repo and reverse repo rates (the rates at which it lends to and borrows from banks). The cut in the latter seems to be the key policy weapon being used by the central bank. It is reducing the interest it is willing to pay banks to park extra cash with it, so as to force them to look at lending to businesses at lower rates.
Indications are that banks have not been lending enough money at a time when industry needs all the cash it can get. Credit off-take has been declining. In the six weeks of lockdown till May 8, bank credit declined by Rs 1.2 lakh crore. During the same time, bank deposits rose by Rs 2.8 lakh crore. Bankers seem to want to play safe and park their ‘moolah’ with RBI rather than risk lending to businesses that do not enjoy the very best ratings. Hence RBI governor Shaktikanta Das’s ploy at reducing the reverse repo to a new low. The big question is, will it work? If businesses are starved of funds, their ability to repay any loan—past or present—will be reduced and a spate of bankruptcies would become a foregone conclusion. Bankers will have to take calculated risks, possibly with the Centre standing guarantor, to hand out loan cheques.
However, RBI’s measures need to be backed by steps to create demand. Factories cannot be restarted in a vacuum. Goods are produced to meet a demand for them. The Indian consumer was reducing his spending even before the coronavirus hit the country. With job losses and reduced incomes, their ability to spend has been further crimped. What India is looking for is extra spending by the Centre to create jobs through large infrastructure projects and support to payrolls of industries hit by the lockdown. Its announced fiscal stimulus has failed to impress. Hopefully, in the weeks ahead, Das’s bold monetary policy will be supported by equally bold fiscal measures.