The RBI has been prompt in helping out during the on-going coronavirus pandemic. Its activist stance in coming up with funds for the beleaguered sectors of the economy has earned the praise of the Government. It has not been wanting in lending a helping hand to banks, various sectors of the economy impacted adversely by the lockdown, relaxing conditions for committed repayment of loans and credit card payments, etc. In fact, its proactive stance has evoked misgivings among economic observers who fear that too much of liquidity sloshing around in the system was unlikely to create demand unless the Government itself created conducive conditions for revival.
By one informed estimate, RBI has pumped in over Rs 7 lakh crores into the banking system in recent weeks. It has most helpfully bought government paper, allowing record government borrowing. Another criticism pertains to the bypassing of the Monetary Policy Committee in recent weeks. Though inflation is still within the prescribed parameters, it is feared that rising pressure on fisc will have a deleterious effect on the general price-line. The toss-up between fiscal discipline and inflation has been a perennial policy conundrum for the authorities. But in this case, the RBI Governor Shaktikanta Das’s statement that the 3.5 per cent limit set under the Fiscal Responsibility and Budget Management Act was no longer sacrosanct would encourage the Centre and the States to loosen the purse strings further. Revenue generation will remain a problem in a disrupted economy, but no matter print currency seems to be the mantra. Extraordinary times called for extraordinary solutions. But it seems there is no end to bad news for the central bank. It feels obliged to bail out every fresh case of failure whether induced by the current pandemic or otherwise.
The latest to benefit from the RBI assistance are mutual funds which have come under pressure due to the lack of fresh investment even as they face increasing demand from investors for redemption of their assets. On Monday, the central bank announced a special window of Rs 50,000 crores for this sector. The crisis was triggered by the decision by a hitherto storied Franklin Templeton Mutual Fund last week to wind up six debt funds with combined assets of over Rs 26,000 crores under management. The fund house said this was due to illiquid and low-rated instruments in its portfolio. The decision was prompted, according to the fund managers, to preserve the current value of the assets and also from growing pressure for redemptions triggered by the pandemic lockdown.
Nearly two decades ago investors in Unit Trust of India had similarly come to grief. But in the case of Franklin Templeton Mutual Fund, the bail-out window of Rs 50,000 crores might be of help only if the lockdown ends soon and the economy is back on the growth trajectory. Otherwise, tens of thousands of investors — one estimate puts their number at over 3 lakh — in Franklin Templeton Mutual Fund alone, stand to lose at least the interest income/dividend on their investments. A spokesman for the fund has assured that at least the principal amount will be paid in a staggered manner once the economic conditions improve.
Meanwhile, the RBI window for mutual fund industry will inject confidence in investors in other mutual funds as well. Given the growing uncertainty stemming from the lockdown, and compounded by the retail investors need for funds due to loss of income during the lockdown, other mutual funds too were experiencing an unusually higher demand for redemptions. The injection of liquidity in the sector by the central bank will stop a run for redemptions on various mutual funds. Lockdown-induced volatility in the share markets and the high-risk investment by some mutual funds with an eye on earning huge returns had made some them illiquid.
Meanwhile, there can be no denying that regardless of proactive intervention by the central bank, it is for the government to loosen the purse strings further in order to alleviate the misery of the population locked out of the wage economy. The much-awaited second installment of the financial package is yet to be announced. Despite the go-ahead to some sectors of the industry these are yet to resume work. Lack of clarity about the payment of wages for the lockdown period and concerns about liability for a corona-infected worker, etc., prevent employers from resuming work. Given that public and private transport still remains disrupted, given the continuing fear of the spread of the virus, it is hard to see the economy getting back on rails anytime soon.