RBI Waves its Monetary Policy Tools

Context: Reserve Bank of India’s monetary policy measures to mitigate the pandemic induced economic losses are ineffective in absence of effective fiscal policy measures.

Monetary Policy Measures by RBI

• Policy rate cuts (repo and reverse repo rates), specially reverse repo rate in the hope that they will extend more loans instead of parking it with RBI.
• Moratorium on loan repayments to prevent a pile-up of dues and reduce borrowers financial stress (convert dues into term loans).

Reasons for failure of Monetary Policy 

• Reduced reverse repo rate: failed to increase banks loan disbursal rate due to:

• Lower demand for loans, due to weak economy.
• Risk aversion behaviour of bankers is restricting loans to even willing borrowers.

• Moratorium on loan repayments: failed to prevent a pile-up of dues because of interest rate charged on payment of dues.
• Policy rate cuts: will keep the yields down in a bond market and will create uncertainty on inflation and the real price of money in India.