Monetary and fiscal: It takes two to tango

In these testing times, the slew of measures taken by the apex bank to revive growth and mitigate the impending economic slump, while maintaining the fragile health of the economy shows that in times of crisis, even the most traditional and conservative body is capable of bold decisions. The RBI’s repo rate cut of 75 bps aimed at providing relief to borrowers and boosting demand is much needed during this crucial lockdown period. The measures to introduce liquidity in the system will ensure stability in the bond market – crucial for investors.

Most welcome is the regulatory move in which banks have been allowed to provide a moratorium of three months which will help borrowers pay EMIs later and not default on their payments. These measures are being seen as part of the apex bank’s long-term vision towards correcting and stabilising  the economy. It is critical that a flexible and accommodative stance is taken to combat the slowing GDP growth and inflation.

While several central banks around the world took the lead by announcing steps to push up demand, the key question should be what actions could be taken to spur corporate investment. The 2008 credit crisis saw several banks across the world undertaking unconventional monetary policy actions to inject liquidity into the banking system.

However, it was seen that while these moves do provide temporary relief, induced liquidity does not always result in corporate investments. This is because most businesses do not base their investment decisions on the availability of short term funding.

All new investments tend to be driven by long-term plans and the government’s fiscal policy, which plays a significant role in influencing the economy. So, going ahead, unless monetary policies are brought in tandem with fiscal policies, such transmissions of liquidity might only serve as a temporary placebo.