Finally acknowledging that the Indian economy is in dire straits, the RBI has once again weighed upon the risk-averse banking system to open its purse strings. It has reduced the reverse repo rate (the rate that banks earn for parking funds with the RBI) by 25 basis points to 3.75 per cent. This comes on the heels of a 90-basis point cut in the reverse repo rate as recently as March 27. As the RBI Governor’s Friday speech reveals, the last reduction did not deter banks from using the reverse repo window. Between March 27-April 14, “systemic liquidity surplus, as reflected in net absorptions under the LAF, averaged ₹4.36 lakh crore”, with this amount touching ₹6.9 lakh crore the next day. In addition, the RBI has stepped up its ‘targeted long-term repo operations’, mandating banks to lend half the sums so raised by them to “small-sized NBFCs and MFIs (micro-finance institutions)”. Banks have so far raised ₹1 lakh crore through TLTROs, including ₹25,000 crore on Friday; another ₹50,000 crore will be released to them in the near future. The moot issue is whether these funds will reach the NBFCs and MFIs at the bottom of the finance pyramid.
The RBI Governor has said that the TLTRO funds should be “invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs”, which prompts the question of whether institutions servicing the needs of tiny businesses will benefit from bank funding. What has complicated matters is that the RBI has excluded HFCs/NBFCs/MFIs from the moratorium announced earlier (refer to Q14 of an FAQ issued by the PIB on April 1). Such institutions will be under pressure to pursue loan repayments from small businesses which are in crisis today. The RBI should extend the three-month moratorium on working capital payments to all institutions. In the present scheme of things, the TLTRO funds are likely to reach only the high-rated NBFCs, which in turn lend to the better-off. Relaxing the NPA norm for accounts availing of the moratorium will help banks and customers; but it is worth considering whether the 90-day rule itself should be extended to 180 days, as suggested by the SBI in its Ecowrap newsletter, in view of the scale of the economic crisis.
The RBI’s response remains underwhelming in relation to the situation. The larger truth is that monetary policy per se has its limits in an economy where appetite to consume and invest has collapsed. There can be no escaping the need for a fiscal stimulus as the key counter-cyclical force.
via RBI’s done what it can; the onus now is on the banking system – The Hindu BusinessLine
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