Analyzing RBI’s Post COVID-19’ Reforms

To revive the ‘COVID-hit’ Indian economy, various Regulatory Authorities have devised policies and approaches to execute their plans. The Reserve Bank of India (RBI), the nation’s Apex Bank, is no exception. Right from the beginning, RBI brought out several Reforms to help out and retain the banking sector’s customers’ expectations.

Objectives of introducing Reforms

  1. To maintain adequate liquidity in the system;
  2. To facilitate credit flows;
  3. To ease financial stress;
  4. To enable the smooth functioning of markets.

Gist of the Reforms introduced by RBI

Aim: To Improve the ‘Liquidity position’ of the economy by injecting money into the financial system.
Cut in the interest rate;
Restrictions on banks seeking to store money with RBI, instead of lending;
Moratorium on loan repayments for all the borrowers;
Allowing an Interest Moratorium to the lending institutions;
Decrease in the repo and reverse-repo rates;
Reconsideration of Cash Reserve Ratio (CRR);
Reconsideration of the Marginal Standing Facility (MSF);
Undertaking Long Term Repo Operations (LTRO);
Providing ease in Working Capital Finance;
Deferment of Net Stable Funding Ratio (NSFR) from 01 April 2020 to 01 October 2020;
Permitting State governments and Union Territories for availing overdraft facilities.

RBI’s call for extensive reforms to cope up with the ‘new normal.’

On 25 August 2020, RBI announced that “Post COVID-19, the overwhelming sense is that the world will not be the same again and a new normal could emerge.”

It further announced that “In a post-pandemic scenario, deep-seated and wide-ranging structural reforms in factor and product markets, the financial sector, legal architecture, and in international competitiveness would be needed to regain potential output losses and return the economy to a path of strong and sustainable growth with macroeconomic and financial stability.”

When compared to the Rest of the World, it will be better noted that “India’s potential output can undergo a structural downshift as the recovery driven by stimulus and regulatory easing gets unwound in a post-pandemic scenario.”

It also added that, “This recovery is likely to be different as the global financial crisis occurred after years of robust growth with macroeconomic stability; by contrast, COVID-19 has hit the economy after consecutive quarters of slowdown.”

Interestingly, Mr. Shaktikanta Das, R.B.I.’s Governor, took to media, on 27 August 2020, to highlight the need for more reforms in governance culture and risk management practices. Although the banking sector is currently stable, “more needs to be done to bring about more reforms,” the Governor said.

At the event, the Governor had mentioned that the following factors were in favor of the current Indian economy:-

  1. Improved Debt to Gross Domestic Product ratio;
  2. An in-check fiscal deficit;
  3. Well-controlled inflation;
  4. Better Current Account.

He also stated that the Apex Bank has ‘not exhausted its ammunition,’ be it rate cuts or any other policy actions, to deal with the current situation due to the virus outbreak. It is to be noted that the RBI has refrained from providing any forecast on growth or inflation and is part of the few Central Banks around the world not to do so.

To strengthen this move of RBI, the Governor told that, “The Central Bank doesn’t have the luxury of giving one number today and modifying it one or two months down the road.” “Once there is some amount of clarity about the COVID curve or the other aspects around COVID, then RBI will certainly start giving the numbers,” he added.

Were RBI’s Reforms successful?

So far, RBI’s decisions have been warmly welcomed by several economy sectors, without any significant opposition. Various experts have expressed their satisfaction with the decisions taken by India’s Apex Bank (especially the one on Restructuring of loans for the corporates). Although these Reforms might have provided the required relief to the customers to a reasonable extent, RBI’s Governor still feels that more Reforms can be introduced in the banking sector (as mentioned on 27 August 2020 at an event organized by the Business Standard newspaper).

Rumki Majumdar, Deloitte India’s Economist, said that ‘the RBI’s dynamic, proactive, and balanced approach is in line with our expectations that the central bank will be looking at alternate measures such as forward guidance and maintain sufficient liquidity.”

Ishpreet Singh Gandhi, Founder and Managing Partner at Stride Ventures, said, “Under the new priority sector lending norms, startups will now be able to attract better pricing.”

Naveen Kukreja, Chief Executive Officer and Co-founder at paisabazaar.com, appreciated RBI’s decision on increasing the ‘Loan To Value’ (LTV) ration in gold loans.
The public did not react any differently,

With every economy trying their best to recover from the invisible virus’s considerable blow, there is a time for everything under the Heavens. One can expect that these reforms have been devised and placed to shape a possible tomorrow’s economy.

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