The US tariff shock along with other geopolitical headwinds have emerged as a serious obstacle to growth. Both, the Centre and the RBI need to act purposefully. The RBI has been taking a series of measures in recent months to ease liquidity and decrease borrowing cost for consumers. The final guidelines on Liquidity Coverage Ratio are another move in this direction. These rules are quite lenient compared to the draft proposal put out in July 2024, and are expected to improve system liquidity by ₹2.7-3 lakh crore.

The Basel III framework for liquidity standards tries to ensure that banks have adequate high quality liquid assets to face a high stress scenario lasting 30 days. The framework lays down the run-off rate or the drawdown rates for each category of liability. While the draft circular issued in July 2024 had prescribed an additional 5 per cent run off rate for deposits from individuals and small businesses acquired through digital channels, the new guidelines lower the rate to 2.5 per cent. Similarly, the revised guidelines have lowered the run-off factor for wholesale deposits from trusts, partnerships, LLPs. These LCR changes will significantly improve system liquidity once implemented next fiscal year. It may be recalled that liquidity had become very tight in the early part of this year due to seasonal factors and RBI’s forex operations to support the rupee. The RBI had injected durable liquidity of around ₹7.9 lakh crore through open market operations, longer duration VRR auctions and forex swaps since this January to redress the situation. LCR relaxation will further improve durable liquidity.

The RBI has taken various measures to improve flow of credit in the economy. Two consecutive 25-basis points cuts in repo rate in February and April have led to a decline in interest rates in the market, providing a breather to borrowers. Lowering of risk weights assigned to bank lending to NBFCs from April 2025 will ensure that NBFCs are able to access bank funding to enable them to on-lend to small businesses and retail borrowers. Recently, the central bank expanded co-lending guidelines, allowing banks and NBFCs to jointly lend to all borrowers. Co-lending was restricted to priority sector loans earlier. Similarly, putting project finance guidelines on hold — a step which would have locked up funds for project finance provisioning — can provide a short-term impetus to credit growth. The RBI is acting in a pragmatic manner given the deceleration in credit growth, especially in the personal loan category.

In a time of global disruption, it is important to ensure that domestic consumption is robust. Along with the income tax cuts announced in the Budget, better credit availability can do the needful to buttress consumption. The IMF’s World Economic Outlook points to a 50 basis points dip in global growth in 2025 to 2.8 per cent over its January projections. The writing is on the wall: open the spigots.

Published on April 25, 2025