India responded to Covid-19 as soon as it was becoming clear that a

pandemic was in the offing. The government imposed a sudden

nationwide total lockdown on March 25, 2020. This lasted until end of
May 2020 and was then lifted in phases subsequently. The country
suffered a severe economic contraction with Gross Domestic Product
(GDP) estimated to have fallen by 24% in Q1 FY 2021 and by 7.3% in
FY 2020-21 as a whole. The policy response to the economic impact
of both the pandemic and the consequent lockdown was the usual mix
of fiscal, monetary and financial measures, but relatively light on fiscal
measures. At 2-2.5% of GDP, India’s stimulus spending has been at
the lower end amongst emerging markets.

RBI, in cooperation with the Government of India, has succeeded in achieving

its broad objective of keeping financial intermediaries, financial markets and
the financial system as a whole sound, liquid, and functioning smoothly.(Mint
Archives)
This paper discusses the role of Reserve Bank of India (RBI) in India’s
fight against the pandemic. It documents the various policies
undertaken by the RBI in its capacity as the monetary authority, lead
financial system regulator and supervisor of financial intermediaries,
banker to and debt manager of the central and state governments,
currency issuer and manager, and regulator and operator of the
payment and settlement system.

The paper also decodes numerous policy instruments at the disposal

of RBI and effectiveness of measures such as the credit enhancement
schemes, and loan moratoriums which may not have had the desired
effects.
As the monetary authority, the Monetary Policy Committee (MPC) laid
a triple objective of mitigating negative effects of the virus, reviving
growth and preserving financial stability. To ease economic hardship
while keeping inflation in check, the RBI slashed interest rates keeping
the policy repo rate at a low of 4%. The cash reserve ratio (CRR) was
lowered, which provided additional liquidity to help aid banking
system. The goal was to ensure that no part of the financial system
faced liquidity concerns or credit constraints.
To tide over the pandemic, it was paramount for government and the
central bank policies to work in tandem. To ensure that governments
did not have to cut their spending due to shortfalls in revenue, RBI
needed to enable both central and state government to borrow
adequately in debt markets. As a banker to the central and state
governments, the limit on ways and means advances for both central
and state government was increased. Aside from this, through open
market operations, RBI purchased about 30% of central government’s
net market borrowings in FY 2021 and has committed to continue to
purchase substantial amounts in FY 2022 through the G-sec
Acquisition Programme.
Special OMOs – through Operation Twist (OT) involving the
simultaneous purchasing of long-term government securities and
selling corresponding short-term securities of similar amounts in a
liquidity neutral fashion, have lowered long-term yield and
smoothened the curve. The Reserve Bank was successful in
managing the large government borrowing in FY 2021 at a weighted
average borrowing cost for the central government, at just 5.79%, the
lowest in 16 years.
As regulator of the banking system, it is crucial that the interests of
both borrowers and lenders are aligned to ensure stability of the
financial system. A host of measures were put in place to help in the
continued smooth functioning of financial intermediaries including
banks and non-banking financial companies (NBFCs).
On the one hand, these policy measures were aimed at protecting and
helping borrowers in this time of economic and financial stress brought
on by the pandemic and the consequent lockdowns. On the other
hand, measures were also put in place to provide regulatory relief to
financial intermediaries in terms of their access to liquidity and
regulatory forbearance to protect their balance sheets. The overall aim
was to keep credit flowing despite all the disruptions being
experienced by the economy and financial markets.
Overall, the RBI, in cooperation with the Government of India, has
succeeded in achieving its broad objective of keeping financial
intermediaries, financial markets and the financial system as a whole
sound, liquid, and functioning smoothly. It has maintained financial
stability despite initial conditions of the Indian financial intermediaries
being stressed as a consequence of legacy problems. But very
significant challenges remain as this crisis unfolds further in both India
and the rest of the world. It has also protected households as well as
small and large businesses from experiencing acute financial stress
for the time being, but stresses will emerge once regulatory
forbearance is lifted.
Transmission of the highly accommodative monetary policy, and the
corresponding liquidity management, has been largely successful.
Interest rates have fallen across the board and g-sec yields are at
almost record lows, with most real interest rates now being in negative
territory. However, the RBI’s liquidity injection has been so large that
there was an almost consistent systemic liquidity surplus of about ₹6
trillion (about 3% of GDP) that needed to be absorbed by the RBI on a
daily basis.
However, despite all the measures implemented to promote the flow
of credit to all segments of the market, credit growth has continued to
be sluggish except for a significant increase to the small and medium
scale enterprise (SMSE) sector. Hence there is a mismatch between
the performance of the real sector and financial markets. This could
potentially lead to enhanced stresses experienced by both lenders
and borrowers, leading to potential financial instability. Thus, financial
stability challenges remain for the Indian financial system and its
regulator in the months to come.
The Reserve Bank of India (RBI) on Friday announced a slew of
measures in order to provide relief for the ongoing Coronavirus
outbreak in India. These include:
1) Repo Rate – RBI announced that it was cutting the repo rate by
75 bps, or 0.75% to 4.4. The Repo Rate was earlier 5.15; last
being cut in October 2019.
2) Reverse Repo – The regulator also announced that it would cut
the Reverse Repo rate by 90 bps, or 0.90%. On a daily average,
banks had been parking Rs 3 lakh crore with the RBI. The current
reverse repo rate was 4%.
3) Loan Moratorium – In a massive relief for the middle class, the
RBI Governor also announced that lenders could give a
moratorium of 3 months on term loans, outstanding as on 1
March, 2020. This is applicable to All Commercial Banks including
Regional, Rural, Small Finance, Co-Op Bank, All India Financial
Institutions and NBFCs including Housing Finance and
Microfinance. Advt
4) CRR – The RBI also announced that the Cash Reserve Ratio
(CRR) would be reduced by 100 bps, or 1%, to 3% . This would
be applicable from March 28, and would inject Rs. 1,37,000 crore.
5) LTRO – The RBI will also undertake Long Term Repo
Operations (LTRO); allowing further liquidity with the banks. The
banks however are specified that this liquidity will be deployed in
in commercial papers, investment grade corporate bonds and
non-convertible debentures.
6) Ease of Working Capital financing – Lenders were allowed
lending to recalculate drawing power by reducing margins and/or
by reassessing the working capital cycle for the borrowers. The
RBI also specified that such a move would not result in asset
classification downgrade.
7) Working Capital Interest – A Three month interest moratorium
shall also be permitted to all lending institutions.
8) Deferment of NSFR- The Net Stable Funding Ratio (NSFR),
which reduces funding risk by requiring banks to fund their
activities with sufficiently stable sources of funding was postponed
to October 1, 2020. The NSFR was earlier supposed to be
implemented by April 1, 2020.
9) MSF – Marginal Standing Facility (MSF) has also been
increased to 3% of SLR, available till June 30, 2020. “This
measure should provide comfort to the banking system by
allowing it to avail an additional ` 1,37,000 crore of liquidity under
the LAF window in times of stress at the reduced” said the RBI.
Advt
10) Fresh Liquidity – The impact of all the announcements today
shall inject almost 3.2% of GDP, the Governor said in his brief
today. The RBI also added that since February 2020 it had
injected Rs 2.8 lakh crore of liquidity, equivalent to 1.4 percent of
GDP.