All-out efforts are needed to mitigate the adverse impact of the COVID-19 pandemic, and the RBI will use any instrument necessary to revive growth and preserve financial stability, according to the minutes of the central bank’s policy meeting.
The Monetary Policy Committee (MPC), headed by Reserve Bank of India (RBI) Governor Shaktikanta Das, was originally scheduled for March 31, April 1 and 3, 2020, but was advanced because of the coronavirus pandemic.
After the three-day meeting which ended on March 27, the RBI reduced the key policy rate by 75 basis points.
To mitigate the economic difficulties arising out of the virus outbreak, the government of India has announced a comprehensive package of Rs 1.70 lakh crore, covering cash transfers and food security, for vulnerable sections of society.
As per the minutes of the MPC meeting, released by the RBI, Das said the global macroeconomic situation has abruptly worsened in the last fortnight or so.
He stated that the authorities and central banks in many countries have deployed an extensive range of targeted policy instruments to deal with the macroeconomic fallout of COVID-19 caused by lockdowns and social distancing.
In his opinion, “there is a rising probability” of a global recession, which may be deeper than the one experienced during the global financial crisis.
“In India also, the near-term growth outlook has deteriorated sharply: initially reflecting global spillovers and the amplification of the impact of COVID-19; and thereafter, due to the much-needed efforts by the government to contain the pandemic by declaring a nationwide lockdown,” he said.
On the inflation front, Das said the outlook has changed drastically.
The governor said the usual uptick that begins in summer months may remain subdued if demand conditions take longer to normalise. The weakening of domestic aggregate demand may also help to contain core inflation.
“The COVID-19 pandemic is an invisible assassin which needs to be contained quickly before it spreads and wreaks havoc on valuable human lives and the macroeconomy.
“In this scenario, it is important to ensure that finance, which is the lifeline of the economy, keeps flowing seamlessly to various sectors of the economy,” said Das, and added the macroeconomic fundamentals of the economy continue to be sound.
He further said growth impulses face strong headwinds from sluggish aggregate demand and disruptions in supply of labour and key inputs, including imports.
“The erosion of consumer confidence and investment sentiment can operate in an adverse feedback loop to worsen the growth outlook even further,” he said.
Das said monetary policy needs to proactively arrest any deterioration in aggregate demand as he advocated a 75 basis reduction in repo rate.
“The 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.
RBI Deputy Governor and MPC member Michael Debabrata Patra said India has locked down and a state of siege prevails in wake of coronavirus outbreak.
Several types of activities have come to a standstill with social isolation, supply disruptions, demand contraction and heightened anxiety.
“The outlook for the economy is highly uncertain and shifts with every incoming data on the impact of the virus. Prospects for the Indian economy now hinge around how pervasive and severe COVID-19 turns out to be, and how long it lasts,” he said.
In these challenging circumstances, Patra opined monetary policy has to assume an avant-garde role.
“Even as it fights the corrosive impact of COVID-19 on macroeconomic and financial conditions, monetary policy has to provide confidence and assuage fear,” he said while voting for a 75 basis points reduction in the short-term lending rate.
MPC member and RBI Executive Director Janak Raj said the reduction in the policy rate, together with several other liquidities enhancing measures being separately announced by the Reserve Bank, should ease financing conditions and address financial stability risks.
He also voted for persevering with the accommodative stance as long as necessary to revive growth and to mitigate the adverse impact of COVID-19, while ensuring that inflation remains within the target.
Ravindra H Dholakia too voted for the rate cut.
“There is still enough space for the policy rate cut as and when required to support growth recovery going forward since inflation is likely to be under control,” he added.
Pami Dua and Chetan Ghate had advocated a reduction in repo rate by 50 basis points.
The RBI went ahead with the majority vote and reduced the key lending rate by 75 basis points.