Mumbai, August 06: RBI Governor Shaktikanta Das on Thursday defended the easy liquidity stance of the central bank, asserting that the private sector entities have benefitted out of the policy.
Das said the measures, which got adopted with deep rate cuts, have also ensured faster transmission of the policy rates into the actual lending by banks, in turn helping the economy. At present, the overall excess liquidity is at over Rs 5 lakh crore.
There has been a criticism that the excess liquidity framework helps lower the cost of borrowing for the government as the yields on bonds go down. Among others, former deputy governor Viral Acharya had recently advocated keeping the system in small liquidity deficit.
"I thought it necessary to point out some of these aspects which are known, which are obviously available in the public domain, but I often hear questions being raised in the public space," Das said while reading out his policy statement on Thursday.
"Transmission of the rate cuts by the MPC would not have been possible to the extent achieved so far without creating comfortable liquidity conditions," he added.
He said large amounts of liquidity were infused in and out of the system through injections and absorptions through the liquidity adjustment facility and added that easing of financial conditions has enhanced monetary policy transmission and also effectiveness of the Monetary Policy Committee's actions.
"It is worthwhile to see who is benefiting from RBI's actions," Das said, listing out the benefits of the measures to the non-bank lenders segment which was starved of liquidity following the IL&FS crisis.
He said the long-term repo operations and the 'operation twist' carried out by the RBI have helped narrow the spread between corporate bonds and government securities of the same tenor as the illiquidity premia dissipated.
Borrowing costs in the financial markets dropped to a decadal low on abundant liquidity , and the lower costs led to a record primary issuance of bonds at Rs 2.09 lakh crore in April-June, he said.
In particular, market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures, he added.
Although non-food bank credit has slowed to 5.6 per cent (as on July 17), credit to NBFCs grew at 25.7 per cent in June, loans to services at 10.7 per cent, and to housing at 12.5 per cent, Das said adding that monetary transmission has also improved considerably.
The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 1.62 per cent between February 2019 and June 2020 (as against policy cuts of 2.50 per cent), of which 0.91 per cent transmission was witnessed during March-June 2020, Das said.
Abundant liquidity has also supported other segments of the financial market, particularly, the mutual funds which have "stabilised" since the Franklin Templeton episode earlier this year, Das said.
In his recently released book on financial stability, Acharya writes, "In fact, once sufficiently fiscally dominated, the liquidity policy can control most of the government bond yield curve and prices, rendering the rate-setting process of monetary policy authority effectively irrelevant."
Acharya, who quit six months ahead of the end of his term, has said that there was "intense pressure" on the RBI to open up "liquidity and credit taps" to help the economy when he was at Mint Road.
"We shall remain alert and watchful and collectively do whatever is necessary to revive the economy and preserve financial stability. Courage and conviction will conquer COVID-19," Das said on Thursday.