In yet another monetary policy offensive that was surprising for its speed if not its direction, the RBI has announced a three-pronged package to provide economic relief from Covid-related distress. Hoping to revive appetite for credit and consumption in a demand-deprived economy, it announced a further 40-basis point cut in repo rates by the Monetary Policy Committee (MPC), taking the aggregate rate cuts since the onset of Covid to a significant 115 basis points. It has permitted lenders to extend their three-month loan moratoriums beyond end-May, while allowing interest dues during this period to be converted into fresh loans. It has also thrown a lifeline to exporters by giving them a line of credit via Exim Bank and extending the applicability of pre- and post-shipment credit, while freeing up resources for State governments to service earlier debt.
While some of these moves will provide relief to existing borrowers whose incomes have taken a battering from the pandemic, whether they will resurrect spending or stoke renewed appetite for credit, is moot. With a 43-basis point decline in lending rates since March, banks have no doubt begun to more quickly transmit lower policy rates to borrowers, nudged by the RBI, by effecting steep cuts to their deposit rates. But credit flow to industry growing at less than 1 per cent according to latest RBI data, and banks parking record sums in the reverse repo window, point to a continuing aversion on bankers’ part to take on any borrowers beyond top-notch large corporates. In the bond markets, while the RBI’s interventions have had the effect of sharply moderating treasury yields and yields for PSU borrowers in the last couple of months, spreads for most corporate borrowers have widened sharply indicating the markets’ aversion to credit risks in any form. These trends effectively prevent most businesses from benefiting from repo rate cuts. Given that RBI’s ploy of steep cuts in reverse repo rates is not deterring banks from parking record sums with it, perhaps alternatives — such as limiting the reverse repo accommodation, or further credit guarantees — can be considered. Credit guarantees can prove effective to address risk aversion too, if the identity of the guarantor and provisioning-related issues cited by MSMEs are sorted out.
More important than these measures though, is the RBI’s frank acknowledgement that the economic impact of the pandemic is turning out to be graver than it initially anticipated, with GDP growth likely to turn negative in FY21. In contrast to the Centre which has been frugal with its fiscal stimulus — ostensibly to keep powder dry for when things get much worse — the RBI seems to believe that the time to act is now. It is good that it has been able to prevail upon the MPC to substantially ease monetary conditions, despite the uncertain inflation outlook. The Centre would do well to take cues from this proactive approach.