The domestic stock market is witnessing the worst sell-off, Indian rupee is depreciating against the US dollar, and threats to economy are amplified by the COVID-19 outbreak. In a surprise move, RBI Governor Shaktikanta Das, who usually address the media after a monetary policy meeting, made an exception to soothe financial markets. The message was clear - RBI has adequate firepower to fight the coronavirus threat, as and when required. "RBI has several policy instruments at its disposal. We will use the various policy instruments from time to time depending upon requirements," announced Governor Das. So what are the liquidity tools in the RBI's armoury:
Slash interest rate to create positive sentiments
The RBI had carried out a series of repo rate cuts in the last year on the back of lower inflation rate. The aggressive cut in repo rate was also done to support the falling growth in the economy. The current high retail inflation, however, doesn't leave any scope for a repo rate cut from the existing 5.15 per cent. But given the evolving scenario post COVID-19, there is an emerging case for a rate cut. Globally, the US and the UK have already taken a lead in reducing interest rates. RBI Governor also didn't rule out the possibility. "We will decide our action (rate cut) depending upon the evolving situation," said the RBI Governor. The next monetary policy committee meeting is in the first week of April.
Partial or select CRR exemption to push funds
For almost a decade, the RBI has kept cash reserve ratio (CRR) at 4 per cent of deposits. CRR is that portion of deposits that banks have to keep with RBI in the form of cash. On a Rs 128 lakh crore deposit, the CRR of banks with RBI would be Rs 5 lakh crore. In February, the RBI had selectively provided CRR exemption on incremental loans to auto, housing and MSMEs to spur demand in the economy. This CRR exemption can either be given selectively to sectors impact by COVID-19, like hospitality, transportation, electronics, or even a flat reduction from 4 per cent to 3.5 per cent.
Reducing the statutory liquidity ratio to help banks
The statutory liquidity ratio (SLR) is yet another tool to create liquidity in the system. SLR is part of the deposits that banks have to compulsorily put in government securities and bonds. SLR has been reduced from a high 25-26 per cent level to 19.5 per cent. The last reduction took place some two and a half years ago. In the current challenging times for the banking industry, there is a case for further reduction in SLR. This will release additional resources for banks to deploy in the market.
Bond buying by RBI
The quantitative easing (QE) by the global central banks post 2008 financial crisis was basically about buying government securities and releasing funds in exchange. The QE funds helped these economies avoid a recession. The RBI also does bond buying. In fact, this is yet another tool available with RBI to infuse liquidity into the banking system to help the industry.
Clearly, the two liquidity tools - rupee-dollar swap and long term repo - recently announced by the RBI are just a beginning, and more measures will follow. But RBI alone cannot help fight the drastic impact of COVID-19 in different industries and the economy, the government has to step in with fiscal measures.