‘Extent of economic loss highly uncertain’

HYDERABAD: Even though the Reserve Bank of India (RBI) reduced rate cuts in March to minimise the worsening economic momentum, the six-member Monetary Policy Committee (MPC) indicated that the 
extent of the dampening demand and productivity loss remains uncertain until the Covid-19 pandemic subsides.     

The MPC met last month to announce an emergency rate cut to prop up the economy.  The minutes of the meeting, released Monday, showed that the decision to slash rates was unanimous, but not on the quantum of the rate cuts with two external members —Chetan Ghate and Pami Dua — favouring a 50 bps repo rate reduction instead of 75 bps, which the central bank announced on March, 27. The repo rate stands at 4.4 per cent.  

While Ghate likened the rate cut action to an insurance cut to minimise the extent of permanent damage to growth and falling aggregate demand, he emphasised that monetary policy has never proved able to reverse large shocks. “It only helps to mitigate the worse effects of shocks, and speeds up the recovery,” he said. Weaker overall demand outlook and lower crude oil prices should keep upside risks to inflation firmly contained even in the face of temporary supply chain disruptions and scope for opportunistic 
use of pricing power, pointed out Shaktikanta Das, governor, RBI. 

“Arresting risks to growth outlook and preserving financial stability should, accordingly, receive the highest priority,” Das said.  He added it was important to ensure that finance, the lifeline of the economy, should keeps flowing seamlessly to various sectors.“It is comforting that the macroeconomic fundamentals of the economy continue to be sound, especially in comparison with the conditions that prevailed in the aftermath of the Global Financial Crisis,” he said.    

According to Michael Patra, deputy governor in charge of monetary policy, the outlook for the economy was highly uncertain and shifts with every incoming data on the impact of the virus. In these challenging times, he said, monetary policy has to ergo assume an ‘avant garde role,’ and even as it fights the corrosive impact of Covid-19 on macroeconomic and financial conditions, monetary policy has to provide confidence and assuage fear. “It’s important, however, to emphasise that Covid-19 is a global crisis and warrants action beyond the remit of monetary policy, within the country, and across the world,” Patra noted.

Top priorities
Preserving financial stability and arresting risks to growth should receive the highest priority, according to RBI governor.