Amidst a major slowdown in economy owing to the Covid-19-induced lockdown, the Reserve Bank of India announced a reduction in the repo and reverse repo rates, permitting more elbow room to banks to lend.
India’s central bank also extended the moratorium on EMI payments and repayment of loans of certain categories by three months.
The RBI is clearly trying to revive the demand side of the economy. Putting more money in the hands of the consumers will spur the demand across sectors of the economy and help it revive its growth prospects.
However, the issue till date has not been the lack of capital to lend. Banks have since the beginning of the year received more than Rs 5 lakh crores due to constant monetary policy cuts. However, it is the transmission of this money to the consumers is what is yet to take place.
RBI Governor’s assertion that growth is likely to be in the negative territory in financial year 2020-21 is the alarm bell the government would do well to listen to. Economic activities except agriculture are likely to stay depressed given the lockdown. Only a limited economic activity can be envisaged post lockdown as well given the shortage of labour and social distancing norms in the second quarters.
It appears to be a long and rough ride ahead. And the central bank will have to keep coming up with ways to provide stability and maintain liquidity.