The RBI’s recent announcement of reducing the repo rate to the lowest ever level is a welcome step to improve liquidity in the Indian market. These announcement came within 24 hours of financial package of Rs 1.70 lakh crore given in the name of Pradhanmantri Garib Kalyan Yojna (PMGKY). Most of the benefits given under PMGKY are in the form of direct benefit transfer. These benefits are not possible to comply without sufficient liquidity in the market. Therefore, the RBI’s announcements were expected on similar lines.
While the relief package of the Finance Minister only addressed the issues of the poor and marginal members of the society, the RBI announcements are more comprehensive in nature. The RBI also allowed EMI and working capital holiday. This is not waiver, but a kind of deferment of payment of EMIs and Interest on Working Capital for three months. This is going to be a big relief to a large number of citizens who have taken credit from banks.
Objective of these announcements is to ensure that growth is not declined too much and at the same time too much liquidity does not increase inflation. According to estimates of the National Statistics Office, GDP growth of Indian economy is expected to be 5% for 2019-20. This was the estimation in February 2020. Except the agriculture sector, almost all sectors of economy are going to be hit the hardest. With the current pandemic, Indian GDP estimates are going to be revised. Since it is a black swan moment, it is difficult to reassess the figures.
Economy is composed of various sectors. Organized vs unorganized, registered labors vs unregistered labors, different types of industries, manufacturing Vs services and more such classifications are possible. All sectors cannot be addressed with one solution. Therefore, the Finance Minister and the RBI have taken two different trajectories to address most of the concerns of economy. The RBI also announced lowering of reverse repo rate by 90 basis point which will make deposits by commercial banks at RBI unattractive. These commercial banks will lend more money to the industry at cheaper rate expecting increase in demand post COVID times. Hopefully, it will help industry to work with cheaper capital. Increase in demand is also dependent on the cash available in the hands of customer. During lockdown, many citizens will have cash to fulfill their essential needs and they will not have surplus savings to purchase for shoes, clothes, electronic gadgets etc. Therefore, the Finance Minister package is seen from the point of boosting the demand and the RBI announcements to enhance the supply with cheaper inputs.
It is also important to realize that impact of these monetary stimulus cannot be checked from the performance of the Sensex. Many analysts are not able to find any relation between the sinking of the Sensex post announcement. RBI needs to keep a close watch on the macro indicators. Start of pandemic from the month of December 2019 till date means that Q4 results of almost all economies will be in negative. So it is going to give a level playing field to all major economies of the world. Since this is a global situation, a single country should not develop panic about growth rates. Can we think of removing this COVID period from the economic history of the world? Or we can think of starting fresh calculations post the COVID environment.
This is an extraordinary situation and extraordinary measures are being taken at all levels. India is home to the largest number of bottom of pyramid population in the world. Ensuring their well-being is our first priority. The RBI announcements and the Finance Minster’s relief package will help in the short term to these most vulnerable population of our country and at the same time provide relief to the MSME sector of the country.
(By Prof Rajat Agrawal, Department of Management Studies, IIT Roorkee)