ASSESSMENT OF RBI’S RESPONSE
Anand Kumar Singh
Assistant Professor (Law)
National Law University Jodhpur
UNDERSTANDING THE BASIC RULES
Interplay of Monetary Policy (governed by RBI) and Fiscal Policy (regulated by Govt.)
FISCAL POLICY: pursuit of High GDP (vision of $5 Trillion); a calibration of raising of loans, tax policies,
service charge, non-tax matters such as divestment, etc. with expenditures of salaries, pensions, subsidies, funds
used for creating capital assets like bridges, roads, etc
MONETARY POLICY: Maintain liquidity (supply of money), credit rate and keep Inflation in check (Target for
2016-21= ~ 4%; +/- 2%; FITF, 2016) [CRR/SLR/REPO/Reverse REPO/OMO]
GOLDEN RULE: High/Less Money supply in economy = More/Less demand= More/Less production by suppliers
= High/Low GDP & High/Low Inflation
CLASSICAL PARADOX: High GDP requires increase in Demand and therefore loans must get cheap BUT cheap
loans = more money = high demand =Higher inflation = RBI Unhappy!
RBI’S RESPONSIBILITY: Monetary Policy, Liquidity Management, Financial Regulation And Supervision
QUANTITATIVE & QUALITATIVE TOOLS
CRR = % NDTL parked with RBI in Cash (no interest paid on these)
SLR = % NDTL that banks must keep reserve in liquid form (gold, G-Sec.,etc)
Less CRR/SLR= More money with banks to lend = High GDP = High Inflation
REPO = RBI’s lending rate to banks through G-secs.; a forward contract with repurchase obligation on banks
Rev. REPO = RBI absorbs excess cash with banks through selling of G-secs.; repurchase obligation on RBI
Less REPO/Rev. REPO = cheaper & more Money with banks = More loans = High GDP = High Inflation
INDIAN ECONOMY BEFORE COVID-19
GDP for Q4 of FY 2019-20: estimated 4% but came out at 3.1%
Demonetization: Black money/corruption/counterfeit currency/digital currency
But, 99.3% of junked currency came back!; currency in circulation again high;
Cash-dependent informal sector (~40% GDP & 80% employment) was worst hit;
Construction & real estate went down; traders hit - farmers not paid; MSMEs closed;
MNREGA dependency increased. Overall demand went down = Low GDP
GST: Low demand & supply contractions
Failing Banks and scams: NPAs in PSBs; Fall of IL&FS; PNB/Yes Bank scams
SUMMARY: 1) Low Consumption Expenditure ; 2) Low Investments;
3) Banks saddled with NPAs; 4) Menace of “Shadow banking”; 5) MSMEs in tight spot due to demonetization & GST
IMPACT OF COVID-19 ON INDIAN ECONOMY
Acute contraction in demand, from the beginning March 2020, due to fall in private consumption
Massive dislocation in production, supply chains, trade and tourism
Extremely high unemployment; Massive loss of jobs in informal sector and daily wage group
The Startup story has gone haywire; FMCGs operations are restricted to “essentials”
Sharp sell offs in equity markets; Sovereign bond yields at record low
Fall in prices of crude oil = Regular Wages and employment at risk; (BUT, will help govt. deal with
High rise in MNREGA employment
RBI’S RESPONSE TO COVID-19
COVID-19 STIMULUS PACKAGE
(27th March 2020; 17th April 2020; 23rd May 2020)
(Relaxing repayment pressures and improving access to working capital, prevent the transmission of financial stress to the
real economy, and ensure the continuity of viable businesses and households)
1. Targeted Long Term Repos Operations: assuring banks about the availability of durable liquidity at reasonable cost
relative to prevailing market conditions. (linked with REPO rate; for 1-3 years; “Targeted” deployment of funds (min.
50%) into corporate bonds/commercial papers/NCDs of corporates/NBFCs/MFI)
2. Reduction in CRR (1st since 2013): from 4% to 3% to help banks lend more
3. SLR reduced: from 18.5% to 18%. More availability of funds for lending
4. Extending Marginal Standing Facility limit: would allow banks to use 3% (instead of 2%) from their SLR reserves, in
case the above two measures prove to be insufficient.
5. REPO/Rev. REPO slashed: 4% & 3.35% respect. More availability of funds/ Less incentive to park money with RBI.
The first three measures would ensure a liquidity injection of Rs. 3.74 lakh cr.
(Effective period: 01st March – 31st August 2020)
1. Moratorium for payment of instalments of Term Loans (loans for acquiring lands, constructing buildings, buying machinery,
purchasing commercial vehicles, etc.): of 6 months to reduce burden of repayment in times of acute crisis. (Interest shall
continue to accrue on the outstanding portion)
2. Deferment of Interest on Working Capital Facilities (loans for day to day short term operations): for 6 months (Accumulated
accrued interest shall be recovered)
3. Exemption from being classified as ‘defaulter’in supervisory reporting and reporting to credit information companies
(Prudential Framework on Stressed Asset of 7th June 2019): Non-payment of instalments/interest would not classify an
account as ‘Spl. Mention Ac.’ or NPA. Asset classification standstill by excluding the moratorium period.
4. Refinancing Facilities for All India Financial Institutions (NABARD/SIDBI/NHB): These play a crucial role in long-term
funding requirements of agriculture and the rural sector, small industries, housing finance companies, NBFCs and MFIs.
Hence, a refinancing window of Rs. 50,000 Cr. (25k/15k/10k).
5. Increase in Ways & Means Advances for Centre/States: By 60%. Revenue generation from GST, petroleum products, liquor,
motor vehicles, stamp duty or registration fee has dried due to prolonged economic inactivity. Moreover, increase in
expenditure due to purchase of PPE kit, testing kits, ventilators, etc. (sec. 17 of RBI Act requires repayment within 03 months
6. Suspension of Dividend Distribution by Banks
7. Group Exposure Limit of Banks increased from 25% to 30% to help corporates meet their capital req. (till 30th June 2021)
ANALYSIS OF RBI’S RESPONSE
Liquidity Infusion (~ Rs. 8lk Cr.) would help financial institutions overcome distress
Non –participation of banks in Targeted Long term REPO Operations
Low Risk Appetite of Banks - Prefer Keeping Money With RBI Over Lending It To Corporate Houses/Individuals
Issue Of Moratorium/Deferred Interest Payments - No ‘Waiver’ but inly ‘deferment’ (Gajendra Sharma v. U.O.I,
Diary No. 11127-2020)
Discretion with Banks to effect “Moratorium” - NBFCs severely hit and banks not transferring the benefits; India
Bulls Housing finance Ltd. v. HDFC ~ Delhi H.C. upheld the ‘discretionary’ nature of the circular; Kamal Kumar Kalia
v. Union of India ~ S.C. directed RBI to ensure implementation and ruled that Circular applied to all borrowers.
Asset Classification under Prudential Frame work - Anant Raj Limited v. Yes Bank Limited ~ Delhi H.C. rejected the
Lending bank’s asset classification of borrowed as default occurred prior to specified period; Ideal Toll & Infra. Pvt. Ltd
v. ICICI Home Finance ~ Bombay H.C. instructed a revised payment schedule for the defaulting borrower. Transcon
Skycity. v. ICICI Bank ~ Bombay H.C. ruled that moratorium period must be excluded for Asset re-classification
Increasing Group exposure limit leads to heavy concentration of capital which can be catastrophic in the long run.
Low Demand Remains Biggest Challenge - The Supply Side Constraints Are Mostly Due To Severe Form Of
Lockdown. Banks loaded with sufficient credit.. In Such A Scenario, Fiscal Policy (Govt.’s Fiscal Stimulus
Package)Becomes Game Changer!
Adequate protection of Bank Depositors is also important. In order to support economic activity, borrowing is
encouraged through reduction of policy rates. This adversely impacts the depositors (saving bank a/c holders, FD
holders, etc.) as the banks lowers the interest rate on their deposits to cover up for the loss of revenue from borrowers.
Debt-Monetization (RBI purchasing G-Secs through fresh printing of money) to cover a widening Fiscal Deficit
(govt. expenditure > Revenues); not a very sound idea; can lead to inflationary trends.
RBI participation in T-Bills and Bonds auction through proxy has been reported.
Idea Economic justice for the middle class, lower middle class and daily wage borrowers and depositors who are the
propellers and backbone of every economic activity most – Waiver of “interest” on lines of farmer’s loan waiver
These are war times– can’t have best of both: guns (Jaan) and butter (Jahaan); butter must be rationed for more guns
Schumpeter’s “Creative Destruction” -- A blend of Harold Laski/John Keynes and Adam Smith/ Milton Freidman in
India’s “Way forward”-- for India is a vibrant “politico-economy” with the “invisible hand” showing up every 5th