At a time when India is making all-out efforts to counter the adverse impact of the COVID-19 on the growth momentum of the economy, the decision of the Reserve Bank of India (RBI) to leave the lending rate unchanged while maintaining an accommodative stance to support the economy is indeed pragmatic given the prevailing macroeconomic environment.
The six-member Monetary Policy Committee (MPC) headed by the RBI Governor while refraining from cutting the benchmark lending rates which are already at a historic low of 4 per cent also has announced much-needed measures like restructuring of loans amid the urgency to revive the coronavirus hit economy.
As RBI Governor Shaktikanta Das said, “MPC voted for keeping the interest rate unchanged and continued with its accommodative stance to support growth”.
The RBI last revised its policy rate on May 22 in an off-policy cycle to perk up demand by cutting interest rate to historic low. The fast changing macroeconomic environment and the deteriorating growth outlook necessitated off-cycle meetings of the MPC- first in March and again in May this year.
The RBI has been taking steps proactively to limit the stress caused to the economy due to the pandemic and subsequent lock downs. While analysts feel the RBI decision to keep the policy rates unchanged is on expected lines, restructuring of loans is more essential at this juncture to combat the impact of COVID-19.
As Finance Minister Nirmala Sitharaman said few days back, “the focus is on restructuring. The Finance Ministry is actively engaged with the RBI on this. In principle the idea that there may be a restructuring required is well taken.”
Accordingly, the RBI has risen to the occasion by announcing formation of a high level committee headed by K V Kamath for evolving a ‘Restructuring Framework’ for the stressed borrowers. This step would go a long way in helping lenders in the process. Maintaining the credit discipline, the apex bank has notably not left discretions of financial parameters for eligibility to individual banks. The proposed high level committee will decide the rules of the game.
As a reputed and high profile banker like Mr. Kamath will be heading this committee, it gives great comfort and reassurance that the financial parameters would be non-discriminatory and liberal enough, taking into account the hardship being faced by the borrowers across the spectrum.
The peculiar economic scenario caused by the COVID-19 has to be met with out of the box measures. The need of the hour is a liberal loan restructuring plan without compromising the credit discipline.
The RBI has genuinely taken a holistic view of the domestic and global economy in the backdrop of the once-in-a century global health crisis. For instance, the RBI’s decisions like providing for the additional liquidity window of Rs. 5000 crore each for the Housing Finance Companies and the NABARD should provide some relief to the stressed sectors.
Similarly, RBI’s decision to relax loans to the value ratio up to 90 per cent for gold loans is a great relief for households who are facing severe liquidity crunch due to loss of the incomes.
With gold prices witnessing sharp increase in the last few months the households with precious assets can certainly get much higher loan against their gold pledges. Another significant decision of the RBI relates to the inclusion of the “Start Ups” in the priority sector. This would result in reduced cost of borrowing for the budding entrepreneurs. Likewise, further measures on the Micro Small and Medium Enterprises (MSME) debt restructuring are much needed and welcome features of the RBI policy announcement.
On resumption of economic activity in the country, the central bank said, the economy has started to recover from the lows of April-May following the re-opening of some parts of the country. The RBI Governor said recovery in the rural economy is expected to be robust, buoyed by the progress in ‘Kharif’ sowing and a normal South West Monsoon.
Summing up, the RBI policy goes much beyond tweaking of the policy rates and has dealt with some of the key structural issues, which are vital to spur the growth momentum of the economy.
Script: Aditya Raj Das, Senior Economic Journalist