It might be useful for the Reserve Bank of India (RBI) to glance through the latest issue of the central bank’s Weekly Statistical Supplement. Since April 1, till April 24, non-food bank credit has declined by over Rs 1 lakh crore. This, after RBI force-fed them liquidity worth nearly Rs 8 lakh crore through an alphabet soup of special facilities. Given this hard reality, how can RBI continue with the pretence that lowering policy rates and magnanimously adopting an accommodative stance will help push money into the hands of India’s economic agents? Accept the reality that India’s banks, burdened as they are by bad debt and hobbled as they are by the fear of incriminating investigations of credit decisions, are poor vehicles of financial intermediation. RBI has to look at other means, while the banks mend.
Lowering the repo rate and the reverse repo rate by 40 basis points was the least the Monetary Policy Committee could do, after acknowledging the probability of negative growth this fiscal. Implicit in this decision is a statement that has a bearing on the government’s fiscal choices: this is not the time to worry about inflation, but to try and salvage growth from rubble, to which Covid-19 and the lockdown have reduced swathes of the economy. That is welcome. But what is the point of converting the interest accumulating over the six-month moratorium on loan servicing into a funded interest term loan, if it has to be fully amortised this fiscal itself? If economic growth is expected to be negative, how can companies generate enough revenue and operating profits to pay off such dues in the current fiscal? The US Fed is using some special vehicles set up by the Treasury to buy bonds issued by companies. What prevents RBI from taking such an initiative and putting money in the hands of economic agents, instead of being expansively accommodative towards banks that find it hard to lend?
Yes, the liberalisation of credit for exporters and importers is welcome. However, in a year in which world trade will shrink, domestic demand is where the action has to be.