RBI guv calls for ‘full throttle’ on easing financial conditions
Drastic measures needed to offset demand collapse amid the pandemic
MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das called for a substantial easing of financing conditions when the lockdown is lifted, minutes of the central bank’s last rate-setting meeting showed, with members agreeing that the coronavirus pandemic has dealt a far more severe blow to the domestic economy than anticipated.
The monetary policy committee (MPC) meeting, which was scheduled from June 3 to 5, was advanced to May 20-22 as macroeconomic conditions deteriorated. On May 12 , Prime Minister Narendra Modi announced a ₹20 lakh crore stimulus package to support individuals and businesses.
“While all these measures should help support demand as and when the nationwide lockdown is lifted, 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 revitalise investment. Since banks are the key players in financing consumption and investment, it is also imperative that they remain adequately capitalised,” the RBI governor said at the meeting.
On Friday, RBI released the minutes of the meeting, where the committee decided to cut policy rates by 40 basis points.
“Delaying timely monetary policy response by two weeks, waiting for the bi-monthly MPC meeting schedule, could be costly and irreversible. In fact, such a delay in monetary policy action could potentially become a source of risk itself to the deteriorating growth outlook,” read the minutes. According to governor Das, the key challenge for monetary policy at the current stage was to resuscitate domestic demand to avoid any harmful effect on income and employment in the short run, and potential growth over the medium term.
Along with the government’s ₹20 lakh crore Atmanirbhar package to provide economic support and protect the vulnerable sections of society, the RBI has also been proactively managing liquidity to ensure that funds flow to all productive sectors of the economy.
RBI deputy governor and MPC member Michael Patra also supported the governor’s view that threats to growth should be addressed “frontally and aggressively.”
RBI’s executive director and new MPC member Janak Raj said he expects economic activity to contract in 2020-21. “While supply lines are likely to be restored, 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,” he said.
He also stressed on the need to capitalise banks to ensure easier financing conditions.