The recent outbreak of the Coronavirus (Covid-9) has caused unprecedented disruptions across the world, both at the national and international levels. It has adversely impacted business operations and economic activity across all sectors, while significantly disrupting global supply chains, thereby endangering expectations of a global recovery in 2020.
While global policymakers try and support international financial markets and the real economy through coordinated policy actions, it is imperative that domestic policymakers also come forward and join in through coordinated policy response. Urgent measures and steps to combat the crisis at the national level is critical as the Covid-19 outbreak is bound to impact growth by curtailing consumption and investments as a result of reduced spending.
While the Reserve Bank of India (RBI) introduced a host of innovative measures in its last monetary policy, the industry strongly feels that more such measures should continue in the face of the crisis as it is necessary to boost sentiment. The Confederation of Indian Industry (CII) feels that though the RBI’s scheduled bi-monthly meeting is due in April, it could announce growth supportive measures even earlier.
CII suggests that a rate cut of at least 50 points before the April meet might positively impact the economy by enhancing liquidity and that the RBI should not be hesitant to cut rates, even by a larger proportion, in line with global central banks, such as the US Federal Reserve and the Bank of England, which have lowered interest rates to bolster markets in the face of the corona crisis.
Sectors such as the Micro, Small and Medium Enterprises (MSME’s) are particularly vulnerable as the spread of the coronavirus have severely hampered their operations along with revenues due to disruptions in global supply chains. Thus, providing additional targeted liquidity support to such sectors may be the need of the hour, beyond the further increase in the quantum of liquidity support to be provided under the Long-Term Repo Operations (LTROs).
The RBI could follow in the footsteps of the European Central Bank, which recently announced several measures, including launching a new round of targeted longer-term refinancing operations (TLTROs) to support bank lending to those affected most by the spread of the coronavirus, specifically for the small and medium-sized enterprises.
The Indian banking sector also stands susceptible to greater risks as uncertainty and fears over the corona crisis mounts further. Therefore, the RBI needs to proactively undertake constructive moves to prevent the build up of stress in the banking sector, apart from continuing to provide support to various sectors and the economy in general. There is also a need to promote and engage in frequent dialogue with the industry and the banking sector to identify challenges and come up with timely interventions.
Given the current scenario, the role of the RBI as the central bank and the supervisor and monetary authority of banks needs to be reconsidered. As the central bank, while the RBI keeps a check and makes decisions regarding the monetary policy, currency, forex reserves, CII has recommended the creation of a separate unit under the aegis of the RBI, which will be responsible for oversight, monitoring and supervision of both private sector and public sector banks of the economy. This move, while according a distinctive role to the RBI as the central bank and the regulator of the banks in India, will also greatly improve the efficacy in the RBI’s performance.