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UPSC Syllabus: Mains:  GS Paper 3: Economic development


This article has appeared in the newspaper in the context of publication of RBI’s annual report for the financial year 2020-21. Based upon the analysis of this report, the article highlights that the RBI has taken swift and timely actions to deal with the economic woes caused by the Covid-19 pandemic. Going forward, the sustained efforts of the RBI must be complemented by the Government.


In order to deal with Covid-19, the RBI has adopted expansionary monetary policy and has reduced policy rates such as Repo rates. The RBI has also injected liquidity into the economy through a combination of both conventional and unconventional policy tools such as Repo, Open Market Operations, Reduction in Reverse Repo, Targeted Long Term Repo operations (TLTROs) etc.

The RBI has also sought to bring down the yield rates on the long-term G-Secs through the Operation Twist.

On account of these policy actions taken by the RBI, the rates of interest on the loans given by the Banks have also declined. Ideally, the decline in the interest rates should have led to higher credit creation leading to an increase in investment and consumption expenditure and hence economic revival.

Unfortunately, the decline in the interest rates has failed to translate into higher credit creation. The financial year 2020-21 has registered lowest Credit growth in the last 10 years. So, what explains this anomaly?

  1. Supply Side Problem: The Banks are sitting on surplus liquidity and are reluctant to give loans due to the fear of increase in NPAs. Rather than giving loans, the Banks are parking their surplus liquidity with the RBI through the Reverse Repo route.
  2. Demand Side Problem: Both Individuals and Private sector are staring at higher level of uncertainty caused due to Covid-19. Poor sentiment among the individuals and private sector has led to lower demand for loans.

Way Forward

The RBI has made optimum use of the tools at its disposal and has also unveiled new tools to deal with the unprecedented economic situation. The RBI has already done its work quite efficiently. Now, it is the time for the government to complement the efforts of the RBI. As the Economic Survey 2020-21 has recommended, the Union Government must adopt Counter Cyclical Fiscal policy to revive animal spirits and boost economic growth.


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