But RBI’s arrows are having diminishing impact
Reserve Bank of India governor Shaktikanta Das yesterday indicated that national output may shrink this financial year, which would make it the first such instance in four decades. His estimate (approximate) came in the backdrop of an off-cycle meeting of the central bank’s monetary policy committee that lowered policy rate by 0.40 percentage points to 4%. Alongside, the committee said that RBI will be expansive in injecting liquidity for as long as it’s necessary to revive economic growth. The main message is that the macroeconomic (relating to the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity) impact of the Covid-19 outbreak is more severe than RBI initially anticipated.
To stabilise the situation, RBI will extend a moratorium on payment of instalments of term loans by another three months to end-August. There are also other measures such as deferment (postponement) of payment of interest on working capital loans for the same duration. A noteworthy measure announced by RBI is one that aims to ease the burden of states. Withdrawal rules of a consolidated sinking fund maintained by states have been eased to help them service their debt. This is the third time in less than two months that RBI has stepped in. A measure of the support is the Rs 9.42 trillion (4.6% of GDP) of liquidity augmenting measures introduced since February.
Despite RBI’s willingness to pull out all the stops, the economic situation is grim. It’s partly because efficacy of monetary measures requires lending institutions to shed their reticence (reserve). The plethora of measures have pushed average lending and deposit rates down but credit growth is muted. The logjam can be broken only by fiscal measures. The government’s recent stimulus package had some fiscal measures but RBI’s off-cycle meeting suggests these are inadequate. Finance minister Nirmala Sitharaman said she has an open mind on additional measures. Unleash them, to revive private consumption.