From UPSC perspective, the following things are important :
Prelims level : Nothing much
Mains level : Monetary Policy Transmission
Op-ed of the day is the most important editorial of the day. This will cover a key issue that came in the news and for which students must pay attention. This will also take care of certain key issues students have to cover in respective GS papers.
RBI’s accelerated monetary policy response since February has provided the first line of defence to India’s acute growth slowdown. Yet the pace of policy rate transmission and investment revival is very slow.
Impact of Monetary policy easing is low
- Monetary policy easing has impacted government bonds more favourably than corporate bonds. Corporate yields did not fall because of high credit risk perception.
- Transmission through the banking channel was very slow. Leading banks lowered the 1-year MCLR by 25-40 basis points against the policy rate reduction of 110 bps.
- Low investment confidence was also visible in the 67% year-on-year plunge in non-convertible debentures (NCDs).
- The investment momentum was weak because of several factors such as downgrades, unsustainable borrowings by some large companies, a continued funding crunch for NBFCs/ HFCs and low capital adequacy of public sector banks.
- Global headwinds and domestic policy flip flops further weakened the investment sentiment.
- There is scope for further reduction in the repo rate by 35-40 bps. H
Despite falling rates, the material impact on improving investment spending remains a challenge because of the obstacles to monetary transmission.
- The weight of structural factors has increased in the slowdown. Cyclical stimulus measures may not be enough to restore investment confidence.
- Monetary policy is too blunt a tool to take care of sector-specific issues, as it simultaneously affects all sectors of the economy.
- India needs targeted interventions and sector-specific corrective measures for its ailing sectors such as infrastructure, real estate, MSMEs, export industries, and financial intermediaries such as PSBs, NBFCs/HFCs and mutual funds.
- Fiscal stimulus worth ₹1.45 trillion through corporate tax reduction is a step in the right direction.
- The focus of the monetary policy should shift to financial stability issues such as restoring confidence in financial intermediaries and getting credit flowing again at a reasonable price.
- Other corrective measures should be aimed at removing structural constraints for various productive sectors.
- RBI’s policy emphasis should be on strengthening the NBFC sector – which is a dominant lender to retail, rural, housing and MSMEs, which contributes more than 20% of the total credit.
- Two policy priorities for RBI
- Set up a “lender of last resort” facility for NBFCs. This should undertake repo of securities, backed by NBFCs’ loan portfolio. It can be restricted to NBFCs that are more bank-like in nature, adequately capitalised and have top ratings.
- Facilitate long-term funding for NBFCs.
- At present, PSBs cannot lend to NBFCs because of capital shortage.
- RBI may advise the government to extend special dispensations/bank guarantees to PSBs for taking additional exposure to well-governed NBFCs.
- Long-term tax saving bonds may be reintroduced for infrastructure financiers.
- Listed NBFCs, may be kept out of the group exposure limit to improve their access to bank funds.
- Innovative instruments, such as covered bonds, may be promoted to make available enhanced funding from insurance/pension funds to NBFCs.
- RBI may also allow systemically important, well-governed, top-rated NBFCs to raise public deposits.
Unless the regulator addresses growing risks to financial stability, monetary policy will not be effective beyond a certain limit.