RBI: THE ARMOUR AND ABSORBER

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.