Bikky Khosla | 23 Jun, 2020
Amid the ongoing COVID-19 crisis, the Reserve Bank of
India (RBI), in an out-of-turn Monetary Policy Committee (MPC) meeting last
month, reduced the key interest rate or the repo rate by 40 bps. In another
relief to commercial borrowers, the central bank extended the loan repayment
moratorium for another three months till August 31. While these measures are
welcome, the lingering issue of poor transmission of RBI rate cuts by the banks
to the borrowers is still a concern.
Recently, the Finance Minister raised this issue during
a video conference with an industry body. When the RBI cuts
the repo rate – the rate at which it lends money to banks -- banks
get money at a cheaper rate, but time and again poor transmission
of these rate cuts has led to little change in the credit scenario at the
ground level. But this time, the minister added, the Centre is closely
monitoring the situation in consultation with banks to ensure reduced interest
rates for end-consumers.
Also, though banks have started
disbursing funds to MSMEs under the Emergency Credit Line Guarantee Scheme, credit
is still a huge challenge for many. The scheme excludes
first-time borrowers and those firms accounts of which
have turned bad, and as a result, many MSMEs are facing severe lack of finance,
along with slump in demand during these days. The Centre, therefore, should urgently
consider to operationalize the recently announced scheme for stressed MSMEs.
The RBI, according to the MPC minutes
of the last meet, said that it may continue with its accommodative
stance as the economy is expected to take more time to recover. Also,
a recent report views that the Repo rate can be reduced by another 100 basis
points to limit the cost of government borrowings. In addition, India's
wholesale prices posted 3.2% fall in May
– the sharpest in more than four years – raising expectation of another rate
cut whenever the MPC chooses to meet next.
I invite your opinions.