RBI's Pandemic Response: Stepping out of Oblivion1
Professor Muchkund Dubey, President, Professor Shanta Sinha,
Chairperson, Managing Committee, Professor Sujit Kumar Mishra,
Regional Director (in-Charge), Dr. Sunny Jose, RBI Chair Professor,
faculty and staff of the Council for Social Development, Hyderabad,
(hereafter CSD), students, researchers and faculty joining this event from
various universities and research institutions across the country,
colleagues and friends! It is indeed an honour to share my thoughts today
under the prestigious C D Deshmukh Memorial Lecture Series instituted
by the CSD since 1997.
For the Reserve Bank of India (hereafter RBI), this lecture series
has a special significance. Late Shri Chintaman Dwarakanath Deshmukh
was the first Indian Governor of the RBI from August 11, 1943 to June 30,
1949. His association with the RBI began even earlier in July 1939 when
he was appointed Liaison Officer to the RBI by the Government of India.
Three months later, he was appointed Secretary of the Central Board of
the Bank, two years later in December 1941 as the Deputy Governor, and
then Governor on August 11, 1943. He presided over the transformation
of the RBI from a private shareholders' bank to a nationalised institution.
Under his stewardship, a comprehensive legislation for the regulation of
banking companies was enacted. Another landmark legislation under his
leadership led to the establishment of the first financial institution for the
provision of long-term credit to industry, namely, the Industrial Finance
Corporation of India (IFCI). He also played an important role in the Bretton
Woods Conference in New Hampshire, USA in July 1944, which
established the International Monetary Fund (IMF) and the International
Bank for Reconstruction and Development (IBRD or the World Bank). His
vision and ideas still resonate in the corridors of the RBI.
Among his many outstanding contributions to society at large, Late
Shri Deshmukh and his wife Late Shrimati Durgabai Deshmukh played a
pioneering role in the establishment of the CSD in 1962 as a leading
research and policy studies institution. Today, it is a matter of national
pride that the CSD engages in policy-oriented research with a special
focus on social aspects of development planning, social justice and equity.
Research at the CSD continues to evaluate the diverse impacts of policies
on the relationship between the state and people. Our association with the
CSD also goes back to 1985 when the RBI Chair Professorship was
established. It is a matter of considerable satisfaction that many of our
officers have been associated with the CSD in their self-actualisation.
Against this backdrop, I turn to the theme of my address today,
which is the RBI's response to the pandemic2.
When COVID-19 engulfed the world in early 2020, humans had
become oblivious of pandemics past. Yet, a hundred years ago and before
- between 1817 and 1920 - cholera, plague and influenza pandemics had
visited the world repeatedly and wreaked havoc. Of the estimated 70
million lives lost worldwide - roughly the same as the casualties of the two
World Wars - India had accounted for nearly 60 per cent, and yet
somehow, we had erased those memories. After all, astonishing progress
had been made in the control of diseases, food and nutrition were more
plentily available and we had learned to deal with natural calamities more
effectively. As a result, longevity, which was as low as 25 years in 1920,
had risen to 70 years by 20203.
If we had remembered, we would have prepared for the fact that
influenza can evade pre-existing immunity by mutations. We would have
recalled that infections occur in waves - in the case of the 1918 influenza
pandemic, up to four waves occurred, lasting up to 1920. Our
consciousness would have stirred to the fact that beyond the usual
symptoms of fever and body pain, infections turn pneumonic quickly,
allowing bacteria to attack the lungs. In hindsight, it is this loss of collective
accumulated knowledge that allowed COVID-19 to catch us off-guard. In
fact, this loss of memory resulted in irrational actions - the declaration of
COVID-19 as a pandemic by the World Health Organisation (WHO) on
March 10, 2020 and India's nationwide lockdown that followed set off one
of the biggest migrations in human history as people fled cities in fear of
what was perceived widely as an urban disease only to find that the virus
pursued them to their villages. This amnesia was global. To illustrate, the
WHO, which is mandated to declare pandemics, did so in respect of H1N1
in 2009, but that came to be seriously questioned because it turned out to
be unusually mild, and scrutiny focused on pharmaceutical industries
which benefited from the production and sale of vaccines. The Severe
Acute Respiratory Syndrome (SARS), the Middle East Respiratory
Syndrome-Coronavirus (MERS-COV) and Ebola did spark pervasive
alarm, but casualties were relatively few and the incidence of infections
was localised.
The 2020 pandemic caused worldwide contagion, and the
precipitous loss of lives and livelihood. By the end of 2021, several
advanced economies may have reached or exceeded pre-pandemic
levels of output, but middle income emerging economies have suffered
large losses of output, with the heaviest burden falling on low income
countries. This pandemic is also noteworthy for the unprecedented policy
response mounted by governments and central banks. The IMF estimates
that since March 2020 and up to October 2021, US$16.9 trillion or 16.4
per cent of global GDP had been pledged as fiscal support in response to
the pandemic, with US $ 14.5 trillion provided by advanced economies
(AEs) and US $ 2.4 trillion provided by emerging market economies
(EMEs), including the least developed countries. The total monetary
support was US$19.0 trillion or 18.4 per cent of global GDP, US $ 16.1
trillion by AEs and US$ 2.9 trillion by EMEs.
What guided this once-in-a-lifetime policy response, given the
collective oblivion that I talked about earlier? It was the global financial
crisis of 2008. Typically, in crises of global proportions, it is governments
or fiscal policy that assume a vanguard role, while central banks, known
for their conservativeness and preference for the back office, play a
supportive role as lenders of the last resort. In response to the global
financial crisis, however, it was central banks that rushed to the frontline.
Faced with a loss of their main instrument - the interest rate - which had
fallen to zero, then considered the lower bound to which interest rates can
decline4, central banks unleashed unconventional measures, using their
balance sheets to support economic activity, providing forward guidance
to stabilise expectations and anchor the uncertain future, and directly
influencing longer-term yields at the cost of being accused of the cardinal
sin of effectively monetising stimulus-distended fiscal deficits. In that
sense, they did have some sort of a template when the pandemic arrived.
Leaning against the Pandemic
Among the first steps that the RBI took within six days of the WHO's
declaration of COVID-19 as a pandemic was to create a business
continuity bio-bubble. In the event that the rest of us became infected, 150
selected officers, staff and service providers were kept in isolation in the
bubble to work 24X7 in order to keep essential RBI services such as
currency issue, retail and wholesale payment and settlement systems,
financial markets regulation and supervision and liquidity management, to
name only a salient few that impact the lives of citizens, businesses and
financial institutions on a regular basis. This turned out to be farsighted.
Within days of the national lockdown being announced, financial markets
in India went into seizure, financial institutions were gripped by liquidity
evaporation, and finance, that keeps the wheels of the economy turning,
dried up.
From March 27, 2020 the RBI unfurled a panoply of measures
numbering more than a hundred in total, some conventional and others
out-of-the-box, to address pandemic-induced dislocations and
constraints, both system level and also specific to sectors, institutions and
financial instruments.
In terms of conventional measures, the policy repo rate was reduced
by an unprecedented 115 bps in two phases. The interest rate on the fixed
rate reverse repo rate under the liquidity adjustment facility (LAF), under
which market participants deposit their surpluses with the RBI, was
reduced cumulatively by 155 bps and it became the effective anchor for
the evolution of money market rates and even longer-term interest rates.
Banks' access to liquidity under the marginal standing facility, a lending
window which is priced at 25 bps above the policy repo rate, was
expanded by close to ₹1,37,000 crore. System level liquidity was also
enhanced though large scale open market purchase operations and a one
percentage point reduction in the cash reserve ratio (CRR) that freed up
banks' resources to the extent of ₹1,37,000 crore.
Turning to unconventional measures, long-term repo operations
(LTROs) and targeted long-term repo operations (TLTROs) were
undertaken to augment systemic liquidity, lower the banks' cost of funds
and influence longer-term interest rates more directly. While LTROs
enhanced the overall liquidity in the system, TLTROs ensured the
distribution of liquidity to specific sectors in need of funds. Additionally,
when redemption fears gripped the mutual fund industry, a special liquidity
facility for mutual funds (SLFMF) was crafted virtually over a weekend.
When these liquidity measures encountered risk aversion among banks
in on-lending the RBI's funds to troubled entities, special refinance
facilities were provided to All India Financial Institutions (AIFIs) to mitigate
sector-specific and small institution-specific liquidity constraints. On tap
TLTROs provided liquidity to banks for deployment in corporate bonds,
commercial paper, nonconvertible debentures and bank loans to specific
sectors. In the first half of 2021-22, the RBI pledged its balance sheet to
mitigating the impact of the pandemic and reviving the economy. From
April through September 2021, the RBI engaged in asset purchases
through a secondary market Government securities acquisition
programme (G-SAP) which involved an upfront commitment on amounts
to be purchased and impacted yields directly. Total G-SAP purchases
amounted to ₹2.2 lakh crore. In addition, special open market operations
(OMOs) involving simultaneous purchase and sale of securities, which
were liquidity neutral, were undertaken to distribute liquidity more evenly
across the yield curve, thereby facilitating monetary transmission. Overall,
liquidity augmenting measures worth ₹17.2 lakh crore (8.7 per cent of
nominal GDP of 2020-21) were announced since February 6, 20205.
Forward guidance (FG) gained prominence in the RBI's strategy. In
every statement of the monetary policy committee (MPC), it was reiterated
that the policy stance would remain accommodative, including with explicit
time-contingent and state-contingent guidance. Financial markets were
assured that the Reserve Bank will maintain congenial financial conditions
for sustaining the recovery. This dispelled illiquidity fears and bolstered
market sentiment.
While monetary and liquidity measures addressed the immediate
panic, the dislocations in everyday activity and access to finance brought
to the fore solvency concerns across individuals, small and large
businesses, and raised fears of impending asset quality stress among
banks and financial institutions. Accordingly, the RBI launched a suite of
regulatory measures that included a loan moratorium; asset classification
standstill; easing of working capital financing and deferment of interest;
increasing of group exposure norms; restructuring of advances to micro,
small, and medium enterprises (MSMEs); and reduction of the liquidity
coverage ratio (LCR) requirements, to mention the main initiatives. These
steps provided a temporary reprieve to borrowers affected by the
pandemic and shored up the health of lending institutions, thereby
preserving the resilience of the financial system. Several countercyclical
regulatory measures were also undertaken to ease stress on both
borrowers and the banking system: rationalisation of risk weights for
individual housing loans; revised risk weights for banks' regulatory retail
portfolio; and restrictions on banks from paying out dividends.
On the technological front, the RBI adopted a proactive approach by
leveraging on technology to facilitate digital penetration, innovative
payment options and consumer awareness on the road to a "less cash"
reliant society. A few initiatives were customised, keeping in view social
distancing and contact protocols of the pandemic, including (i) ensuring
availability of digital banking channels, ATMs, internet/mobile banking
facilities; (ii) strengthening cyber security; (iii) developing mechanisms for
faster redressal of customer grievances; and (iv) improving financial
literacy through sustained and focused campaigns through RBI Kehta
Hai6.
The Report Card so far
The impact of these measures is still unravelling and even when the
outcomes have fully formed, a one-to-one correspondence may be difficult
to establish, given the many moving parts that are involved.
Notwithstanding this caveat, however, the overall state of the economy
and of financial markets - which is what these measures sought to
address - provides some evidence of the efficacy or otherwise of the
RBI's pandemic response.
Ahead of the pandemic's onset, the Indian economy was into a
cyclical downturn, with real GDP growth having decelerated in 2019-20 to
its lowest rate in a decade. Consequently, monetary policy had turned
accommodative from February 2019, with a cumulative reduction of 135
bps in the policy rate up to February 2020. System level liquidity was kept
in surplus from June 2019 in consonance with the stance of monetary
policy. At the end of February 2020, market participants had deposited
excess liquidity of the order of ₹3 lakh crore under the LAF.
The first quarter of 2020-21 bore the full brunt of the pandemic's
onslaught. With mobility of people and goods dropping to all-time lows,
real GDP contracted by a precipitous 24.4 per cent, which was among the
deepest in the world. Unemployment peaked at 24 per cent in April,
although in rural areas, farm activity displayed pandemic proofing and the
Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGA) provided a measure of insulation. Exports plunged 61 per
cent in April, with a commensurate decline in imports. The National
Statistical Office could not collect price quotations for compiling the
consumer price index due to the nation-wide lockdown and had to resort
to imputations.
By early June, the fury of the pandemic abated and the pace of
infections started to ebb. This emboldened the unlocking of the economy
in a phased manner that took up to the end of December 2020 to be
completed. As businesses haltingly resumed operations and mobility
around workplaces, grocery stores and pharmacies improved,
outmigration started to reverse and the unemployment rate eased to 10.2
per cent. Supply and work disruptions showed up in inflation surging to
6.2 per cent in June. The Indian economy remained in contraction in the
second quarter of 2020-21 and it was only in the second half of the year
that on the back of policy stimulus, festival-related spending and the
release of pent-up demand a hesitant and uneven recovery started taking
shape. Meanwhile, the RBI's measures brought down borrowing costs to
their lowest in 17 years and narrowed spreads across rating categories
on corporate bonds, commercial paper and debentures to pre-pandemic
levels. By engendering congenial financing conditions, the RBI supported
the recovery. Governments of various levels and corporates utilised this
opportunity to raise a record volume of resources from financial markets.
In the corporate sector, deleveraging was facilitated and high cost debt
could be replaced, reducing vulnerabilities and preparing the sector to
participate in the ongoing recovery. Abundant liquidity and the RBI's
measures enabled a quick and full transmission of policy rate cuts to
deposit and lending rates, easing the cost of funds for bank clientele.
The second wave dented the recovery in the first quarter of 2021-
22, but its impact turned out to be relatively less severe. The Indian
economy renewed its tryst with the interrupted recovery, which gained
strength and pace through the rest of the year. It is estimated that real
GDP will rise by 9.2 per cent during the current financial year, cresting
pre-pandemic levels, and marking a turnaround from the decline of 7.3
per cent the year before. Exports have been the silver lining, growing by
49.7 per cent year-on-year in US dollars terms during April-December
2021 at a time when international trade has been hamstrung by supply
chain disruptions, shortages and logistics impairments. Import demand
has surged on the back of the return of domestic demand to normal
conditions. Employment has yet to recover fully though, and labour
participation remains low. Bank credit has begun to gain pace, helped by
easing of stress in banks' balance sheets. Inflation has eased from
pandemic highs to more tolerable levels in recent months, although it
remains elevated amidst high commodity prices, including of crude.
To summarise, the RBI's measures have contributed significantly in
engineering the turnaround in the Indian economy, supported by rising
financial inclusion and digitalisation. We are on course to becoming
among the fastest growing economies of the world, but there is far to go.
Private consumption and investment are still work in progress. The
restoration of livelihoods and the revival of MSMEs is a formidable task
that lies ahead. The RBI remains committed to revive and sustain growth
on a durable basis and continue to mitigate the impact of COVID-19 on
the economy, while ensuring that inflation remains within the target going
forward.
Governor's Statements
When the definitive chronicle of this period is recorded, history will
judge the role of the RBI in ameliorating the impact of COVID-19 and in
lifting the Indian economy out of the depths of the pandemic's contraction.
I would not hazard the audacity of anticipating the judgment of history, but
today, India is much better placed to deal with future waves of the
pandemic relative to the first wave. In the documentation of this journey,
however, what I fear may not receive a fuller appreciation is that the RBI's
pandemic response was fashioned around and launched with a central
anchor, a leit motif if you will, that bound everything together into a
coherent whole. I refer to the Governor's statements, which have become
an integral element of the institutional edifice of the RBI's pandemic
response. I propose to balance the future narrative upfront by sharing with
you an insider's view of some noteworthy aspects of these statements that
may go unnoticed among the minutiae of rationale, high frequency
indicators and measures.
Delving deep into hidden inner reserves of self-belief, conviction and
fortitude, and guided by the light shone by the words of Mahatma Gandhi,
Governor Shri Shaktikanta Das has made 13 'pandemic' statements so
far, starting on March 27, 2020 when the monetary policy committee
advanced its scheduled meeting to deal with the extraordinary and
unprecedented situation.
The first noteworthy characteristic of the statements is that they
have been visionary. In fact, the statement of February 6, 2020 ahead of
the formal declaration of the pandemic seemed to have a premonition of
the dark days that were to follow. This is reflected in the manner in which
it assured markets that policy space is available for future action, which
needs to be 'suitably timed' and 'used appropriately'. The March 27, 2020
statement called on the nation to mount a war effort to combat COVID-19,
while emphasising that 'tough times never last; only tough people and
tough institutions do'. My sense is that a vision of the unprecedented loss
and isolation that was to follow was already in the mind's eye when that
statement soothed frayed and tense expectations by stating that the RBI
'is at work and in mission mode'. It became the launching pad for
aggressively unleashing an array of instruments covering many of the
liquidity and regulatory measures enumerated in the preceding section as
well as deferment of prudential standards.
Second, the statements were a beacon of light and hope amidst the
encircling gloom. Besides the steadfast encouragement to the nation to
battle the unseen assassin and emerge victorious, they cheered the
warriors at the frontline - government personnel; employees of banks and
financial institutions; doctors, healthcare and medical staff; police and law
enforcement agencies; and all those who kept essential services
operational - commended their tireless striving to beat the virus and
inspired them to raise the bar. For us in the RBI, the messages were
special and personalised, reaching out to those in the bio-bubble and to
those outside it, including those who provided intellectual, analytical and
logistics support for the preparation of the statements. In the thick of the
second wave, the statements of April 7 and June 4, 2021 reposed a belief
in the indomitable spirit of humanity to confront the 'trial by virus', stating
that the need of the hour is not to be overwhelmed but to collectively
overcome. The August 6, 2021 statement emphasised that the RBI
remains in "whatever it takes" mode, with a readiness to deploy all its
policy levers - monetary, prudential or regulatory. As the second wave
waned, the October 2021 statement started guiding the economy on its
course to normalise and entrench the recovery in an Indian trajectory,
notwithstanding diverging paths of growth globally and differing monetary
policy stances.
By the time of the April 17, 2020 statement, it was clear that
providing system level liquidity was not going to be enough because
impediments like risk aversion among banks were standing in the way of
further intermediation towards the small, the disadvantaged and the truly
credit constrained. This brought out the third important characteristic of
Governor's statements: a wide consultative approach, which involved
reaching out directly to all those entities that had been impacted by the
pandemic the most, including small non-banking financial companies
(NBFCs) and micro finance institutions (MFIs), and even vaccine
manufacturers. When inducements to banks to lend did not work, the RBI
reached out to all India financial institutions to onlend to rural and
cooperative institutions, MFIs, and HFCs. In subsequent months, this
approach led to the fashioning of liquidity lines and regulatory relief to
specific sectors identified for restructuring, emergency health services,
contact intensive services, and even individuals and small businesses.
Fourth, the statements in themselves became an instrument of
policy by providing consistent and credible forward guidance, especially
to financial markets. This assumes central relevance because by that
time, the RBI had already acted on conventional instruments to the extent
practicable, and had embarked on unconventional ones, including
asymmetrically widening the policy interest rate corridor and balance
sheet policies, i.e., expansion of its own balance sheet to infuse liquidity
into the system. The statements emphasised financial stability, congenial
financial conditions for growth and the orderly evolution of the yield curve
as public goods and that both market participants and the RBI have a
shared responsibility in securing cooperative solutions. By the time of the
October 2020 statement, Governor's statements started contemplating
the road to recovery, looking back at the hitherto untravelled road and
calling upon the courage of hope to strive and revive. Attention turned to
qualitative aspects like deepening financial markets, digital payments
security, financial inclusion, consumer protection and innovations in
payment and settlement. India became one of the few nations in the world
that ran its real time gross settlement system of swift, seamless and sound
transfers of funds between banks and thereby their customers 365x24x7.
Fifth, the statements became the glue of a new innings in monetary
and fiscal coordination. Pandemic-related fiscal stimulus exacerbated
fiscal deficits and resulted in record levels of market borrowings by both
central and state governments. As the December 2020 statement pointed
out, the RBI's role as debt manager and banker to the government was
tested to the hilt. A recurring theme in several statements has been that
the RBI's policy measures ensured the lowest borrowing costs in nearly
two decades and the highest maturity of the stock of public debt while
ensuring the smooth passage of the borrowing programme. For the states,
ways and means advances limits were enhanced and rules governing
withdrawals from the consolidated sinking fund were relaxed. Liquidity
facilities were linked with credit guarantee schemes offered by the
government. A shining example of monetary fiscal coordination, which
was placed on record by the statement of April 7, 2021 was the
maintenance of status quo in the monetary policy framework by the
government, entrenching a regime in which the inflation target is set by
the government and the RBI is mandated to achieve the target. Yet
another instance that the statements of June 4, August 6, October 8 and
December 8, 2021 underscore is the set of strong supply side
interventions by the government that broke the back of then stubborn food
inflation and brought headline inflation back into the tolerance band.
Sixth, the statements brought to bear first-hand views from
Governor's interactions in various multilateral fora on global
developments and outlook, and the implications of global spillovers for the
Indian economy and for the setting of monetary policy. In hindsight, these
insights turned out to be invaluable. In a situation in which several EMEs
were jumping on to the bandwagon of tightening monetary policy and AEs
were announcing normalisation or joining their EMEs in raising policy
rates, India held its ground and is among a few countries that have
retained an accommodative monetary policy7, despite some views that we
have fallen behind the curve. Only time will tell whether or not India has
got it right but so far, this approach has served us well and helped in
charting a course into the future which is different from the world.
Conclusion
In the hallowed tradition of central banks, the RBI as an institution
shuns the glare of the limelight, preferring to remain unglorified and
grounded. Yet when the chips are down and crises loom, it rises up from
the depths that it inhabits and flings itself at the gathering storm. When
the job is done, the recovery secured and macroeconomic and financial
stability ensured, it falls back, usually unsung, but always on guard. The
pandemic continues to shape the future, but the RBI remains armed and
battle ready. Continuously evaluating highly volatile and uncertain
conditions and remaining prepared to protect the economy from shocks,
the RBI has committed all its instruments to this objective, using
conventional measures and fashioning new ones, as the pandemic
experience showed. The lessons of the pandemic will be imbibed and the
RBI will emerge stronger and more resilient than before, and committed
to its mandate of price stability, keeping in mind the objective of growth.