RBI’s done what it can; the onus now is on the banking system

The larger truth is that monetary policy per se has its limits in an economy where appetite to consume and invest has collapsed

Finally acknowledging that the Indian economy is in dire straits, the RBI has once again weighed upon the risk-averse banking system to open its purse strings. It has reduced the reverse repo rate
(the rate that banks earn for parking funds with the RBI) by 25 basis points to 3.75 per cent. This comes on the heels of a 90-basis point cut in the reverse repo rate as recently as March 27. As the RBI Governor’s Friday speech reveals, the last reduction did not deter banks from using the reverse repo window. Between March 27-April 14, “systemic liquidity surplus, as reflected in net absorptions under the LAF, averaged ₹4.36 lakh crore”, with this amount touching ₹6.9 lakh crore the next day. In addition, the RBI has stepped up its ‘targeted long-term repo operations’, mandating banks to lend half the sums so raised by them to “small-sized NBFCs and MFIs (micro-finance institutions)”. Banks have so far raised ₹1 lakh crore through TLTROs, including ₹25,000 crore on Friday; another ₹50,000 crore will be released to them in the near future. The moot issue is whether these funds will reach the NBFCs and MFIs at the bottom of the finance pyramid.

Courtesy : Business Line