RBI debt recast timely, but more steps needed

In its last week's bi-monthly monetary policy announcement, the Reserve Bank of India pressed the 'pause button' on its rate cut spree. The country's Central bank kicked off its rate cut spree in February 2019 soon after Shaktikanta Das, a retired bureaucrat, assumed charge as the RBI Governor. From a high of 6.25 per cent in February last year, the key repo rate at which the RBI lends to banks has come down to 4 per cent now. Barring on three occasions when it kept the key interest rates unchanged, the apex bank's six-member Monetary Policy Committee (MPC) reduced interest rates whenever it met. The status quo in key rates in this August policy was the fourth 'pause' in the last 19 months.

The RBI Governor cited inflationary pressures for holding key rates this time. However, the apex bank maintained an accommodative stance, hinting that it would go for more rate cuts if the situation warranted. But the key positive takeaway from the RBI's latest bi-monthly policy review is its announcement on one-time debt restructuring for companies and individuals. It has asked banks to provide a window for debt recast by corporate as well as individual borrowers who did not default on repayments till February this year.

This is aimed at easing the financial burden caused by Covid-19 pandemic on borrowers. The decision even enables personal loan borrowers to restructure their debt. Further, the apex bank also increased the loan component on gold value. Till now, financial institutions are allowed to lend gold loans up to 70 per cent of the value of the yellow metal. This has now been enhanced to 90 per cent, thus putting extra funds in the hands of existing and new gold loan borrowers. The load recast scheme will also provide relief to financially-strained MSMEs. RBI set up a five-member committee headed by KV Kamath, former ICICI Bank chairman, to work out modalities for the debt restructuring.

The committee will also come up with sector-specific benchmarks. That way, sectors such as tourism, transport and hospitality which have been impacted the most by the Covid-19 pandemic might get additional reliefs. With its debt recast move, the apex bank conceded the most sought-after demand of India Inc. But it needs to do more to put the Covid-hit economy back on the recovery track as macroeconomic indicators are still sending danger signals. The RBI also admitted that ever-rising Covid-19 cases derailed the recovery process in July. Perhaps, that's why it did not give any indication on the extent of the contraction in India's GDP though it said that the economy would contract in FY21. It may need more time to assess the real impact of the Covid crisis. But infusing life into the economy while keeping inflation in check is not an easy task for the Central bank during this once-in-a-century health and economic crisis. It would have to initiate more steps and put more money into the hands of people without worrying about fiscal deficit. Also, it should not hesitate to print more currency as some developed countries are doing, to tide over the big crisis. For, the majority of Indians need more proactive measures from RBI to put their lives back on a sound economic footing.