Will the rate cuts trickle down to industry? (Monetary policy transmission remains the problem)

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 Will the rate cuts trickle down to industry? (Monetary policy transmission remains the problem)

Read more on - Polity | Economy | Schemes | S&T | Environment


    • Economic disruptions arriving: The health side aside, Indian economy will likely face massive disruptions in coming weeks. The RBI's massive rate cuts (and other measures) are supposed to tackle precisely this. It has tried ensuring liquidity, creating forbearance on financial front, giving moratorium for loan repayments, etc.
    • 2008 versus 2020: The crisis in 2008 also evoked similar RBI response, but back then, the workforce was willing to put in the hours needed. Today, social distancing has changed the entire equation.
    • Liquidity crunch, 2008: The RBI halved its repo rate in 2008 to 4.75%, to fight liquidity issues. Fiscal measures also came in, and finally, GDP growth restarted. That method may not work in 2020. Repo rate cuts may not lead to higher lending, as where will the borrowers come from? Labour disruptions will scare away any capex.
    • RBI's Business Expectations Index: It is at a 12-month low, and will drop further. Repo rate cuts have not anyway led to capex growth. It did not push non-food credit growth either. Drop in MCLR and cheaper home loans too may not work out.
    • Transmission trouble: The RBI knows that monetary policy transmission does not happen fast, and hence has started interveing in market to ensure liquidity. It is hoped that lower repo rates will encourage banks to not hold on to cash.
    • Brace for impact: The virus won't go away anytime soon, so its impact will be for two more quarters. The public health crisis will quickly spin into a financial crisis. The slowdown will turn into a bloodbath. But rate cuts may not matter much beyond a point. Reduced rates will harm the FD earnings of senior citizens.
    • What others are doing: Austria has issued COVID-19 bonds, to finance the emergency aid fund. The US Fed is financing an SPV to lend to firms to carry on business operations. Ths RBI needs to think about it.
    • Summary : The 2020 economic crisis is structurally very different from the 2008 crisis, and a different kind of plan is now needed to avoid a financial meltdown.
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                                                                                                                                            PT's IAS Academy: Will the rate cuts trickle down to industry? (Monetary policy transmission remains the problem)
                                                                                                                                            Will the rate cuts trickle down to industry? (Monetary policy transmission remains the problem)
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