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The domestic economy already showed signs of weakness as the real GDP hit an all-time low
for the decade when the pandemic was declared. The first quarter of 2020 had to absorb most
of the blow as lockdown was declared soon with the factor and commodity mobility plunging
to their lowest and India’s real GDP value gradually depleting. As compared to the urban
centers, the countryside did not experience the economic slowdown immediately as
employment schemes like Mahatma Gandhi National Rural Employment Guarantee Act
(MNREGA) acted like a shield to the rural job market that showed signs of unemployment
much later.
Since the onset of a pandemic on March 27, 2020, the Central Bank employed policy
measures which aggregated to more than a hundred. These were implemented to address
pandemic-related restrictions and dislocations at system, sectoral, institutional and financial
instrument levels. The array of measures to manage liquidity included cutting down the repo
rate in two phases by alarming 115 basis points (or a decrease of 1.15%). Fixed-rate reverse
repo rate under Liquidity Adjustment Facility that allowed market participants to park surplus
with RBI, was reduced by 155 basis points (or a decrease of 1.55%) which in turn provided a
base for the progression of the money market rates and the long-term interest rates. To
amplify the banks’ access to cash, Marginal Standing Facility that allows banks to borrow
from the Central Bank, was raised by Rs. 1,37,000 crore. The Cash Reserve Ratio (CRR) that
determines the proportion of liquid cash to be kept by banks, was brought down by a unit and
was complimented by vigorous large-scale open market operations that fueled the liquidity
by Rs. 1,37,000 crore.
Though monetary and liquidity proposals calmed the pressing panic, interruptions in regular
activities and access to financial resources aggravated the bankruptcy fear over the asset
quality among consumers, small and large firms, banks and financial institutions. The
addressal involved a chain of regulatory measures such as loan moratorium (legally accepted
delay of loan repayment) of six months, halting asset classification, assisting working capital
financing and interest deferment for three months, reforming advances to micro, small and
medium (MSMEs) enterprises, shrinking of Liquidity Coverage Ratio (proportion of high-
quality liquid assets to fund 30 days of cash outflow) requirements, etc. These measures
offered temporary relief to the investors affected by the disease outbreak, simultaneously
boosting the potential of lending institutions and immunizing the economy’s financial
management system. To ensure that the circulation of money or velocity remains intact (as
higher velocity means higher inflation), RBI went on to explore and employ technology. This
made accessible the novel payment methods such as online bank transfers and UPI payments
through apps like Paytm, Google Pay, PhonePe, etc. and promoted the ‘cashless’ culture. To
make sure that the social distancing protocol is not compromised and economic activity is
encouraged, many actionable initiatives were brought into the picture. A few of these are -
promoting digital banking channels and internet or mobile banking facilities; reinforcing cyber security; building channels for rapid redressal of consumer grievances and enhancing
financial literacy and awareness through programs like ‘RBI Kehta Hai’.
As lockdown was lifted in phases, businesses showed improvement and visible mobility was
found in the vicinity of food stores, pharmacies, workplaces, etc. Outmigration picked up
which positively impacted the employment rates and deflated the price rise. The economy
however remained in distress throughout the second quarter of 2020 too. Only in the
succeeding quarter did it show signs of recovery following the expenditure stimulated by the
government and the pent-up demand being released through festival spending. RBI’s
expansionary policies slashed the borrowing costs to the lowest ever in 17 years and to
promote liquidity, spreads on commercial papers, corporate bonds, debentures, etc. were
narrowed to almost the pre-lockdown levels. The central and state governments along with
corporate organizations plunged to grab this opportunity and leverage funds from money
markets. The corporate sector was allowed to sell assets to replace high-risk assets, lessen
liabilities and enhance participation in boosting the economic activity. Such a robust liquidity
generation transformed the policy rate crunches to lending rates, reducing the banks’ cost of
money too.
Throughout these policy reforms, banks exhibited a risk aversion behavior which disrupted
aid to the institutions functioning at a small scale, being disadvantaged or with limited credit
resources, thereby making the system level liquidity inadequate. To resolve this, a review-
based approach was adopted wherein the RBI Governor advised to reach out straight away to
the needy such as Micro-Finance Institutions (MFIs), small Non-Banking Financial
Companies (NBFCs), vaccine manufacturers, etc. this provided the health care sector and
entrepreneurs with small businesses with instant access to credit and relief from regulatory
restrictions. Cuts in excise duty, as well as VAT on fuels and tax reforms, had a positive
effect on the purchasing power of people which in turn encouraged private investment. RBI’s
liquidity management, supervision and regulation of money markets have together addressed
physical and social infrastructural needs. Boosting health, education, innovation and
digitalization have not only proved to be welfare-enhancing but also growth-inducing.
well articulated