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RBI measures a supply-side fix to a demand-side problem, says IIM Professor

E Kumar Sharma     May 22, 2020

Reserve Bank of India governor Shaktikanta Das on Friday announced a cut in the repo rate by 40 bps to 4 per cent. The reverse repo rate stands adjusted at 3.35 per cent from 3.75 per cent earlier. Further, the monetary policy committee (MPC) maintained an accommodative stance on the policy until growth revives.

The governor has announced these measures along with few others such as extension of moratorium on term loans as a solution to the ongoing crisis. However, these are not quite an antidote to deal with the problem at hand. Business Today spoke to M S Sriram, Professor at the Indian Institute of Management Bangalore and an expert in public policy, financial inclusion and problems of urbanisation. While he welcomes the measures announced by the RBI governor and finds them true textbook solutions to stimulate the economy from a monetary side, he feels more than the liquidity, issues around demand-side are what needed to be addressed.

"Reduction in repo rate from 4.4 per cent to 4 per cent and the similar other measures announced earlier by the RBI in March, are all attempts at trying to come up with a supply side fix to a problem which is a demand side problem." In a scenario where there is no credit offtake happening and where risk-averse banks would rather park their funds in RBI bonds than lend to industry, reductions in repo rate is unlikely to help. Also, the cash-strapped industry, faced with little clarity on the emerging consumer behaviour post lockdown or in a post-COVID world, appears to be in no mood to take more credit and add to the interest burden.

Even if there is a welcome extension of the moratorium on interest repayment, it has to be repaid as it is a loan and not a grant or an interest free loan. "What instead may help in the current scenario is measures by the government to put more money in the hands of people. The Rs 20 lakh crore stimulus package is far from adequate to spur the demand due to low net credit outflow from the government. Various reports suggested that it is not more than Rs 2.5 lakh crore and that the hit on the budget is, therefore, just little over 1 per cent of the GDP.

Further, RBI estimates suggested that the non-food credit growth decelerated to between 6 per cent and 7 percent in March 2020, from over 12 per cent in March 2019 due to NPA crisis and rising corporate debt. Similarly, credit growth to agriculture and allied activities decelerated to 4.2 per cent from 7.9 per cent during the same period and the credit growth to industry was down to 0.7 per cent from 6.9 per cent in March 2019. The deceleration in credit growth was also in the services sector and in personal loans. Now, with job cuts and no wages emerging as bigger worries, a wholesome effort at addressing the demand-side challenges could be the only hope.

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