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Central Banks Response and Stimulus Package

Updated: Jan 7, 2021




Breakout of the unknown and the unwanted virus shook the whole world. Shadowing every face with a mask, the pandemic triggered complementary responses from monetary and fiscal authorities.


Central banks reacted swiftly and forcefully to the pandemic, deploying crisis tools within some days. The initial response put spotlight on easing financial stress and ensuring steady flow of credit to non-financial and private sector.

Moreover, a deal was signed between major central banks to lower their rates on currency swaps to help financial market function normally.


Reserve Bank of India

The Reserve Bank of India took various decisions to counter the impact of Corona virus on the economy. Lenders were allowed lending to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. The RBI also specified that such a move would not result in downgrading of asset classification. The Indian economy witnessed the declaration of a ₹20 lack crore Atma Nirbhar Bharat Abhiyan stimulus package which comprised of ₹8.01 lakh crore of liquidity measures announced by the Reserve Bank and ₹1.92 lakh crore package of free food grain & cooking gas to poor along with cash to some sections. Over 1 lakh crore was invested in long term repo operations (LTRO) to improve dollar liquidity. RBI has injected funds amounting to 3.2 per cent of GDP into the economy till now. During October, the RBI proposed additional liquidity measures, including reducing reverse repo rate and TLTRO to relieve the pressure of the crisis on the ravaged economy.


The Fed and ECB

The Fed and The ECB also maintained negative or rock-bottom interest rates and aggressively expanded quantitative easing (QE) programs into previously unchartered waters.

The European Central Bank stepped up in early December to deliver another dose of stimulus package by injecting in huge amounts in its Pandemic Emergency Purchase Program (PEPP) to de-stress the heightened lockdowns and mounting job losses faced by the citizens of Eurozone. The bond-buying program was boosted by 500 billion Euros ($606 billion) and was even extended by nine months to March 2021. The interest rates were left at zero and changes were made in line with the analysed forecast of growth to pick up more slowly in 2021 and 2022 than it was expected earlier.

The US Central Bank, Federal Reserve‘s emergency actions focussed mainly on interest rate cuts, loans and asset purchases, and regulation changes. During March, the interest rates were effectively cut to zero clubbed with a quantitative easing worth $700 billion. The duration of the lending program was further extended till December 31. During October, the Fed committed a paltry $3.7 billion of the $75 billion authorized by the CARES Act and the minimum loan amount was amended from $250,000 to $100,000.

The way Central Banks from all over the world reciprocated to the pandemic indicated that they learned the lessons of the Global Financial Crisis (GFC) when delayed action resulted in severe consequences and widespread criticism. Keeping in view the present crisis, the response has been quick, often official measures have clarified the scale and severity of the downturn.

This garnered praise from many economists and financial market participants, who lauded the early and massive interventions. However, central banks also attracted criticism from those who worry that the dramatic increase in their balance sheets will lead to long-term inflation and, possibly, stagflation and economic depression.


BY-

Aishveen Kaur and Archit Agarwal

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