RBI Governor for going full throttle to ease financing conditions for reviving economy

RBI Governor Shaktikanta Das underlined the need for moving full throttle to ease financing conditions for reviving consumption and revitalizing investment once the coronavirus-induced lockdown is lifted, as per the minutes of the MPC meeting released by the central bank on Friday.

The twenty-third meeting of the Monetary Policy Committee (MPC) was originally scheduled from June 3 to 5, 2020, but was advanced to May 20-22 in view of the ongoing COVID-19 pandemic.

Following the meeting of the key rate-setting body, the RBI reduced the key policy rate by 40 basis points, bringing it down to a historic low of 4 per cent.

All the six members of the MPC, including Das, were of the opinion that the impact of COVID-19 on the economy was more adverse than the initially expected as the lockdown was imposed with an aim to check the spread of the coronavirus pandemic, the minutes showed.

Das said the risks to growth have become far more severe than in the assessment at the end of March 2020.
It is expected that this diagnosis will be validated by hard data over the next few months, even as the overall outlook continues to be highly uncertain, he said.

“The key challenge for monetary policy at this stage is to resuscitate domestic demand to avoid any harmful effect on income and employment in the short run and potential growth over the medium term. For strengthening domestic demand, it is important to revive consumer and business confidence,” said Das, as per the minutes.

The government has already announced a variety of measures to provide economic support to various sectors of the economy and protect the interests of vulnerable sections of society. The Reserve Bank has also been proactively managing liquidity to ensure that funds flow to all productive sectors of the economy.

The RBI has also been easing monetary policy to reduce the cost of funds/capital to revive domestic demand. “While all these measures should help support demand as and when the nation-wide lockdown is lifted, but given the enormity of a collapse in demand, the need is to move ahead full throttle to ease financing conditions further so as to revive consumption and revitalize investment,” the Governor stressed.

MPC member and RBI Deputy Governor Michael Debabrata Patra said at the current juncture, the all-out effort is to maintain and sustain, with the hope that when life is secure, resources, energy and time can be marshalled to rebuild and revive.

“In fact, my view is that the damage is so deep and extensive that India’s potential output has been pushed down, and it will take years to repair.

“In the deliberations of the MPC, my view is that the threats to growth have to be addressed frontally and aggressively, or risk a more dire outlook,” he said.

RBI’s Executive Director, appointed as MPC member in January, was of the view that the economic activity is expected to contract in 2020-21. While supply lines are likely to be restored as lockdown is relaxed, demand would take far longer to revive to pre-COVID levels.

“Even as some support will be provided by government expenditure, overall consumption is likely to slow down due to a slump in private consumption. More than private consumption, however, it is investment demand which is expected to be hit hard in this uncertain environment and may be a huge drag on economic activity in the near future with attendant implications for potential growth,” he said.

During the MPC deliberations, Ravindra H Dholakia said once the situation returns to normal and the fiscal and monetary boost measures start generating impacts, the recovering economy may require some further boost.
It is prudent to preserve some space for the future, he opined.

Pami Dua was of the view that in order to revive growth and mitigate the economic impact of COVID-19, it is important to ease financial conditions further. While voting for 40 basis points cut in repo rate, Dua said in the current scenario, with heightened uncertainty and a near-standstill in economic activity, reduction in policy rates may not necessarily lead to an immediate increase in borrowing but should raise consumer confidence and investor sentiment, going forward.

Chetan Ghate, the only member who voted for 25 bps cut in the repo, said the strongest argument for a big rate cut would, therefore, be the dire growth outcomes because of COVID.

“However, such rate cuts should be saved for when the economy starts reviving, and not when we are in a lock-down. Rate cuts, assuming that there is transmission and banks lend, works most effectively when the economy is on the upside. The MPC should keep some gunpowder dry,” he said.

The other five members of the MPC had voted for a 40 basis points rate cut.

RBI Governor for going full throttle to ease financing conditions for reviving economy via @MasterMindUpdate
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