The RBI’s package relies heavily on banks to pass on the benefits

Faced with unquantifiable risks to India’s economy and financial system from the Covid-19 crisis, the Reserve Bank of India has deployed an impressive array of weapons from its arsenal to contain the fallouts. The Monetary Policy Committee (MPC) has come up with an intra-meeting rate cut of 75 basis points, which if transmitted by lenders, will provide substantial relief to borrowers. It has also announced an asymmetric 90 bps cut in the reverse repo rate, aimed at discouraging banks from parking excess liquidity in government securities and economising on lending. The move to reduce banks’ Cash Reserve Ratio requirement by 100 bps to free up ₹1.37 lakh crore and increase the Marginal Standing Facility by the same amount are good moves too, and will augment primary liquidity for banks at a time when there is exceptional demand for cash withdrawals. Targeted Long-Term Repo Operations amounting to over ₹1 lakh crore, with the proviso that banks will be required to invest the money solely in investment-grade corporate debt is aimed at tackling the logjam in money markets. The three-month moratorium on business loans can help alleviate working capital stress resulting from the lockdown. This moratorium will also apply to retail loans, but at the discretion of lending banks.

While the above package is comprehensive no doubt, its key shortcoming is that the RBI is placing an overwhelming reliance on domestic banks to ensure the trickle-down of this stimulus to deserving segments of the economy. Here the track record of Indian banks is uninspiring. They have been tardy with their rate transmission and frugal with their lending to the needy sectors so far. The structure of this package also shows that the RBI, unlike other central banks, remains unwilling to engage directly with India Inc or distressed sectors such as NBFCs, telecom or MSMEs, no matter how urgent the need. The RBI’s unwillingness to stick its neck out on GDP forecasts at this juncture is understandable, but it seems to be taking unduly sanguine view on inflation, which is already rearing its head on lockdown induced supply shocks.

Overall, India’s central bank appears to have done what it could to cushion the hit to borrowers and the financial system from this crisis. But this still represents a job half done, because the Covid-19 outbreak is a catastrophe afflicting the real economy with unprecedented human costs. The ball is in now in the Centre’s court to ensure that no affected person goes without a safety net in these extraordinary times.

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