RBI Measures during the Second Wave of Coronavirus

New Indian Express

Much like other nations, India was hit by a second wave of COVID-19 with FY2022. At 97.31%, with one of the highest recovery rates among the countries affected by the virus. India also witnessed one of the highest infection rates in the world in its ongoing second wave of over 20%. 

To combat the second wave, various states have been under partial or complete lockdowns. Therefore, the economy which had started showing signs of recovery, also took a hit. Moody’s slashed their prediction for India’s growth rate for FY22 from 13.7% to 9.3% along with other rating agencies. The domestic economy was faced with higher CPI inflation (5.5%), a lower trade deficit (USD 98.6 billion), and a current account deficit (0.2% of the GDP). 

According to the Reserve Bank of India (RBI) governor, the manufacturing sector is the least affected by the pandemic. It is expected to be the sector to drive the economy towards growth in the post-pandemic period. The healthcare sector, several businesses and the micro, small and medium enterprises (MSMEs) were banking on the government and the RBI. With the expectation of measures to ensure enough support and liquidity in the markets. To address these growing concerns, the RBI set forth several steps being taken by the central bank in lieu of the pandemic. The aim was to ensure adequate support and liquidity in the economy for the units. 

To amplify the inadequate medical infrastructure in the country, the RBI introduced an additional Rs. 50,000 crores as an on-tap liquidity window with the banks. This will allow banks to grant credit for medical purposes for a period of up to 3 years at the current repo rate of 4%. In order to create incentives, banks are expected to maintain a COVID-loan book. This will allow them to deposit their excess funds up to the size of this loan book with the RBI at 3.75%. This is 40 basis points (BPS) higher than the reverse repo rate. Further, loans being given out to microfinance institutions will now be considered as part of priority sector lending, which will allow banks to meet the minimum requirements for the priority sector lending more flexibly. Thus, banks will have incentives to give out credit to these institutions to help face individual borrowers’ challenges and liquidity requirements. 

The MSMEs and the unorganized sector are one of the worst affected by economic contraction. Their earnings fell by 20-50% and they faced severe cash crunch problems. Keeping in mind the hardships of the small business units, the RBI is set to start special long-term repo operations, which will allow small finance banks (SFBs) to obtain funds through an auction from the RBI for a tenor of 3 years and these funds can be deployed to only specific borrowers and sectors. This will allow individual borrowers to obtain new loans of up to Rs. 10 lakhs each at the repo rate to deal with the hassles of the pandemic.

Keeping in mind the tight monetary conditions of the MSMEs, the Finance Minister announced an increase in their budgetary allocations to double for this year to Rs. 15,700 crores. Further, it allowed banks to deduct the credit laid out to MSMEs from net demand and time liabilities in (NDTL) calculation of the cash reserve ratio (CRR) requirements. Demand liabilities, which are repayable by banks on-demand, and time liabilities, which are repayable by banks after the end of an agreed period, together comprise NDTL along with other time and deposit liabilities. The NDTL so calculated is used to compute the CRR. This measure will induce commercial banks to increase their advances to the MSMEs. 

Since most of the burden of the second wave is being managed by the states individually, it is bound to put pressure on their fiscal conditions. Thus, acknowledging this, the RBI has made amendments to the overdraft facility available at the disposal of the state governments. The maximum limit for overdrafts has been increased to 50 days in a quarter from the earlier limit of 36 days. 

All these measures to cope with the pandemic will certainly put banks in distress and to help them deal with this, the RBI has allowed the banks to make use of the floating provisions which has been kept aside for non-performing assets (NPAs) to their full capacity. These are the provisions that the banks have made over and above the mandatory requirements by the RBI in case of contingent events. 

The measures announced by the RBI majorly focus on increasing borrowing and lending activities in the economy through the infusion of more money in the form of credit. This, however, can create inflationary pressures in the economy, which will not be a welcome change in the long run. Thus, there is a dilemma of choosing between economic growth and price stability. The RBI might have to intervene again to achieve long-run price stability in the economy since attaining high economic growth seems to be the goal requiring immediate attention.