Ever since the pandemic hit the economy, the RBI has been steadily using all conventional and non-conventional tools to guide the financial sector through the crisis times. These guided efforts and opening up of the productive activities helped the economy to contain the negative growth of GDP at (-)7.5 per cent during Q2 of the current fiscal FY21 much to the surprise of analysts and global think tanks.

It widens the scope for a positive growth in Q4 if not in Q3. The year is expected to end on a better note in a range of (-)7-9 per cent for the full year recouping from (-)24 per cent recorded in Q1.

This is the right time to further activate the adrenaline of the market forces to get the economy pumping. But in the backdrop of inflation staying persistently stubborn at 7.61 per cent in October much beyond the RBI comfort level, it is rather near certain that the repo rate will remain unchanged at 4 per cent. Considering inflation as transitory, the RBI pegged the inflation estimate for the second half of the current fiscal at 4.3-5.4 per cent and real GDP growth at (-)9.5 per cent. While GDP may surpass the estimates, inflation is refusing to abate.

RBI action is working

Having realised the asset-liability constraints of financial intermediaries, the RBI has started providing liquidity for 1-3 years through Long Term Repo Operations (LTROs). It has also been using non-conventional and innovative liquidity windows by launching Targeted Long-Term Repo Operations (TLTROs) to enable banks invest in specific debt instruments — corporate bonds, commercial paper and non-convertible debentures (NCDs) to push credit flow in the economy.

The yield curves have also been tamed by using operation ‘Twist’. Under the mechanism, the apex bank buys long-term bonds and sells short-term bonds. This cools down long-term yields, raises short-term yields, but keeps liquidity neutral. Since yield curve and interest rates are inversely proportionate, it will help market players access funds at lower rates.

Similarly, due to aggressive front-loading repo rate cut by 115 basis points and 155 basis points in reverse repo rate in 2020, the RBI ensured lowering of banks’ lending rates and dissuaded banks from parking funds under reverse repo window. As a result, the weighted average lending rates fell by 68 bps on fresh loans.

In the meantime, past measures of linking all floating rate retail loans and loans to micro, small and medium enterprises (MSME) with repo rates too further lowered lending rates.

As result of such concerted and planned interventions, financial markets are in surplus liquidity, working out close to ₹5.5 trillion. Still the credit off-take of the banking system is low, at 5.7 per cent as on November 6, 2020.

The RBI, having almost moved the liquidity and interest rate management on to a continuous mode, the role of banks assumes greater significance to route the relief measures to the target group of beneficiaries. Banks can make use of the expanded Emergency Credit Line Guarantee Scheme (ECLGS) 2.0 to provide government guaranteed collateral free credit support for 26 stressed sectors identified by the Kamath Committee.

Since these loans carry zero-risk weight with no implications on capital adequacy, banks can tap the opportunity. Banks and non-banks should work together to increase flow of credit to commercial sector.

In the midst of comfortable liquidity position, lower yields, rate transmissions well in progress and inflation headwinds preventing rate interventions, the RBI is left with alternative fire-power. Thus in the next review, the RBI may consider articulating a temporary timeframe of regulatory relaxations in the prudential norms to enable banks and non-banks to dispense faster credit to the ailing sectors of the economy.

Some regulatory relaxations could be in the form of: reduced provision against restructured loans undertaken as per the Kamath Committee and under the MSME scheme; and reduction of risk weights on certain class of loans.

Well-calibrated monetary tools are already working their way to boost the economy. They can be further supplemented with stronger dose of regulatory support to make the combination more striking.

The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views are personal

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