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Last updated: 06 Jun, 2020  

RBI.9.Thmb.jpg 'RBI to continue accommodative as recovery to take time'

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SME Times News Bureau | 06 Jun, 2020
There is near unanimity among Monetary Policy Committee (MPC) members for the Reserve Bank of India to continue with its accommodative stance as the economy, hit by Covid-19 pandemic, is expected to take more time to recover.

According to the MPC minutes of the last meet, a majority of members said that coronavirus outbreak has had a more adverse impact on the economy than previously estimated and it would take longer than the expected for the economy to show some semblance of normalcy.

In the meeting, RBI Deputy Governor Michael Debabrata Patra said the damage is "so deep and extensive" that India's potential output has been pushed down, and it will take years to repair.

Another MPC member, RBI's Executive Director Janak Raj said the impact of Covid-19 on economic activity has turned out to be much more acute than initially expected, with the nation-wide lockdown having been extended from initial three to nine weeks.

He further said that investment demand, is likely to be impacted severely for a variety of reasons such as collapse in demand and excess capacity amongst others.

Similarly, concerns over an economic growth contraction was the other worrying factor, discussed by the members.

"Continuing lockdown in the geographical areas that contribute a major share in the Indian economy and worsening global economic situation due to Covid-19 has now created a distinct possibility of the real GDP growth in India during 2020-21 to be in the negative zone for the first time in the last 40 years," MPC member Ravindra H. Dholakia was quoted as saying in the MPC minutes.

"Even the nominal GDP growth may slip into the negative zone. There are all symptoms of a recession - fall in aggregate demand, negative real growth and high unemployment."

MPC member Pami Dua said that GDP growth in FY 2020-21 is expected to remain in negative territory, with some respite in the second half of the fiscal year.

"The way forward in terms of restoration of economic activity thus depends on the speed with which the pandemic is contained, how quickly the Indian economy opens up, and how soon supply disruptions are repaired and demand revives."

On future rate cuts, MPC member Chetan Ghate said the strongest argument for a big rate cut would 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 lockdown," Ghate said.

"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."

According to RBI Governor Shaktikanta Das, the RBI remains watchful and "shall not hesitate to use any conventional and unconventional tool in its toolkit to revive the macro economy and preserve financial stability while adhering to the inflation target".

On May 22, the Reserve Bank reduced lending rates and extended the moratorium period for interest payments on term loans to mitigate the combined impact of demand compression and supply-side disruption on account of Covid-19 pandemic.

The MPC that time reduced the repo rate by 40 basis points to 4 per cent from 4.40 per cent.

Consequently, the reverse repo rate has automatically been reduced to 3.35 per cent from 3.75 per cent.
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