RBI helps India’s financial condition rebound to better than pre-pandemic level at full speed

India’s financial condition has staged a full-throttle recovery after the coronavirus disruptions and has rebounded to better than the pre-pandemic level. The Financial Condition Index by Crisil Research showed that India’s financial condition has improved significantly and is at a better position than the pre-pandemic level. The Reserve Bank of India is believed to be the major driver of financial condition;s improvement. In lockstep with central banks elsewhere, measures by the RBI have helped mitigate the large and broad-based economic damage caused by the pandemic, said a report by Crisil. While easy global monetary policies have helped, the RBI’s accommodative stance has helped contain short-run pressures no less, the report added. 

Policy rate, liquidity conditions, markets, foreign exchange, and global conditions were the major drivers of the financial conditions this year. Earlier in October 2020, RBI Governor Shaktikanta Das had said that the RBI stands ready to undertake further measures as necessary to assure market participants of access to liquidity and easy financing conditions. 

Since March, the RBI has cut the repo rate by 115 basis points and the reverse repo rate by 155 basis points. It has also purchased ₨ 1.9 lakh crore of G-secs (on a net basis) until September, compared with Rs 0.9 lakh crore in the corresponding period last year. These measures have helped in slashing the interest rates in money and debt markets, and has even got transmitted to bank lending rates to some extent, Crisil added. 

Stress on financial sector 

However, the country’s financial sector still has some major roadblocks. Bank credit growth, which was already weakening before Covid-19, has fallen even further in recent months. Crisil estimated bank credit growth to slow down to a multi-decadal low of 0-1 per cent this fiscal year. Further, high government borrowing and the stress in the corporate bond market are other majors casting shadows of stress on the financial sectors.

Meanwhile, the financial condition in India had been tightening since the IL&FS default in 2018, which triggered a liquidity crisis for non-banking financial companies (NBFCs). The Covid-19 pandemic only magnified this. Consequently, India’s financial condition was the tightest in a decade in April this year, once the lockdown began.