The Economic Survey 2022 released on January 31 says excess liquidity and a stalled insolvency process bring longer-term risks to the financial system.
The Reserve Bank of India had infused a significant amount of liquidity to help the banking system tide over the coronavirus pandemic, while the government put the insolvency process on hold temporarily.
Much of the support was extended into 2021-22 but RBI and the government have allowed some of the liquidity support to roll-off and the insolvency process to resume as the economy has recovered, the survey that was tabled in Parliament said.
“It is important to do this as excess liquidity and a stalled insolvency process bring longer-term risks,” it said.
Noting that an important aspect of the safety-net was the use of government guarantees to provide access to financial support to the economy in general and MSMEs in particular, the survey said combined with a moratorium on insolvency proceedings, the government was able to avoid payments logjam that could have caused a cascade of defaults.
Monetary policy since the outbreak of the pandemic was calibrated to provide a cushion and support growth but carefully controlled to avoid the medium-term dislocations of excess liquidity, the survey said.
The Monetary Policy Committee (MPC) cut the policy repo rate by 115 basis points (bps) during the February-May 2020 period, on top of a reduction of 135 bps in the preceding 12 months. Since then, the MPC has maintained status quo on the policy repo rate keeping