Perspective
By Venkatesh Raghavan
The Reserve Bank of India’s repo rates or rate of lending to commercial banks is not going to change anytime soon owing to the rising number of Covid-19 instances that threaten to reimpose total lockdowns across cities and rural regions of the country.
The RBI, recently was hovering over a decision to lower its lending rates, soon after Union Finance Minister Nirmala Sitharaman sought to lower the interests accrued from small savings schemes in order to facilitate banks to lend to their borrowers at a lower credit rate. However, the Finance Minister’s decision was met with loud cries of protests from around the country and she was compelled to announce a rollback on the policy decision.
Currently, with growing uncertainty looming large on the financial market, both the government at the Centre and the RBI are on a tightrope walk to ensure that the inflation rate is kept pegged at 4%. This requires a balancing act between ensuring that the deposits of Fixed Deposits, Provident Funds and other savings schemes offered by commercial banks do not get into lower yields and at the same time, the government finds a way out to ensure that increased number of businesses including start-ups feel encouraged to avail credit from the commercial banks.
Also read: RBI’s move to keep the interest rates low affects Fixed Deposits lying with banks adversely
“There is an air of uncertainty that prevents most businesses and industrial units from venturing into making new investments or availing of fresh loans. This is causing a great deal of anxiety in business circles as it directly results in the blocking of cash flow and growth in demand as well,” MSME business owner of motors, Amit Shah from Mumbai said.
The task of policy making with the central banker will prove to be no easier as the prolonged economic slowdown not only in the country’s financial hub but also other metro locations does not look like cooling off anytime soon. Though the government has come out with the pronouncement of stimulus packages especially for the MSME sector, the continued low demand factor and lack of reliable supply chain mechanism is hindering the economic growth activity seriously. At the same time, there is high reluctance on part of young entrepreneurs to take risks and launch start-up ventures. “Other than in the IT sector, there is very less likelihood of start-ups availing commercial loans from banks. Here too, owing to heavy competition and saturation the prospects don’t seem to be good,” said Vipul, a venture capitalist who looks into the requirements of the informal sector.
Money markets too are not at ease as both non-banking financial institutions and those lending to facilitate micro-credit ventures are faced with acute shortage of liquidity owing to low depositor confidence that is engendered by the trending of lower interest rates for small savings schemes. Many from the market and business community are already resigned to put up with much lower yields for the forthcoming months.
The short supply of cash, and also the commercial banks being forced to service idle money of depositors owing to low demand for credit outflow has resulted in a perilous situation for the financial health of the country with the only way out being to create adequate spending power among the middle and upper middle-income groups. For now, the government needs to grapple with the need to reimpose lockdown measures in face of mounting economic crisis.
