RBI says it’ll take all steps to fight economic fallout of COVID-19

Inflation may ease sooner and faster, says the central bank governor

Published - April 13, 2020 03:18 pm IST - MUMBAI

File photo of Reserve Bank of India headquarters in Mumbai,

File photo of Reserve Bank of India headquarters in Mumbai,

Reserve Bank of India (RBI) will not hesitate to use any conventional or unconventional policy instruments to mitigate the adverse economic impact caused by COVID-19 , its governor Shaktikanta Das said, according to the minutes of a monetary policy committee (MPC) meeting that was released by the central bank on April 13.

The six-member MPC, at an out of turn meeting in March last week, decided to reduce the policy interest rate by 75 bps to 4.4%, as the nationwide lockdown brought economic activity to a grinding halt . Four of the six members voted for a 75 bps rate cut while Chetan Ghate and Pami Dua voted for 50 bps rate cut. Members agreed that a larger cut was required to minimise the fall in aggregate demand. Mr. Ghate put it: “What is required is in the nature of an insurance cut.”

Mr. Das, in no uncertain terms, outlined the central bank’s resolve to fight the economic fallout of the pandemic. Reserve Bank will continue to remain vigilant and will not hesitate to use any instrument – conventional and unconventional – to mitigate the impact of COVID-19, revive growth and preserve financial stability,” he said.

Global recession

Mr. Das noted that there was a rising probability of a global recession , which may be deeper than the one experienced during the global financial crisis.The near-term growth outlook for India had also deteriorated sharply due to the lockdown. RBI had refrained from making growth forecast during the policy review meeting.

He said that prior to the Coronavirus outbreak, some high frequency indicators such as manufacturing, railway freight traffic, exports and imports in January/February had improved after several months of contraction/deceleration.

Also read: World Bank sees FY21 India growth at 1.5-2.8%, slowest since economic reforms 30 years ago

Also read: Trade in tatters: On the global slump

“With COVID-19, however, industry and service sector activities are likely to be severely impacted and the extent of the adverse impact would depend upon the intensity, spread and duration of COVID-19,” he said and added that the only silver lining was likely to be agriculture, which was expected to remain resilient, with grains production for 2019-20 estimated at a record 292 million tonnes.

While the setback to economic activity could be cushioned to an extent, by the collapse in crude oil prices there could be certain downsides in the form of decline in remittances from oil producing countries.

RBI indicated that there was further scope for policy action to boost economic activity. The inflation outlook had changed drastically due to the sharp fall in oil prices, and food prices may also soften further on the back of record grains and horticulture production.

“In the extreme scenario in which we are, however, the easing off of inflation may occur sooner and faster,” RBI’s deputy governor in charge of monetary policy M.D. Patra said. The inflation outlook offered the scope of taking a “calculated risk on current levels of inflation – which rule above the target – and focus on the 12 months ahead forecast.”

He said, “By this rule, there is space for policy action that is large in size relative to its past but still keeps the policy rate positive in real terms over a one year ahead horizon so as to see off any lingering or latent inflationary pressures.”

On the out of the turn monetary policy review meeting, Mr. Patra observed that the MPC was being called upon to rise beyond its mandate. “The MPC must show the way with the powerful decision that it wields. By doing so, it will leverage and catalyse Reserve Bank into the battlefront role that has to be undertaken for the greater common good,” he said.

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