RBI reduced the key policy rate by 40 basis points to ease financing condition to revive economy

According to the minutes of the Monetary Policy Committee (MPC) released by the central government on Friday 5th May 2020.

The RBI Governor Shaktikanta Das underlined the need to go full throttle to ease financing conditions once the lockdown is lifted.

He said, “In the deliberations of the MPC, my view is that the threats to growth have to be addressed frontally and aggressively, or risk a more dire outlook.”

It was the 23rd meeting of the Monetary Policy Committee (MPC) that is originally scheduled from June 3 to 5, 2020 but was advanced to May 20-22 in view of the ongoing pandemic of COVID-19.

Following the off-scheduled meeting, the RBI reduced the key policy rate by 40 basis points, bringing it down to a historic low of 4%.

All the 6 members of the MPC, including Das, were of the opinion that the pandemic impact of Corona-Virus on the domestic economy was more adverse than the initially expected as the lockdown was imposed with an aim to check the spread of the COVID-19 pandemic, the minutes showed.

Das said that “While all these measures should help support demand as and when the nation-wide lockdown is lifted, but 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 revitalize investment. Since banks are the key players in financing consumption and investment, it is also imperative that they remain adequately capitalized.”

Das also said that “The risks to growth have become far more severe than in the assessment at the end of March 2020 and It is expected that this diagnosis will be validated by hard data over the next few months, even as the overall outlook continues to be highly uncertain.”

As per the minutes, Das said that “The key challenge for monetary policy at this stage is to resuscitate domestic demand to avoid any harmful effect on income and employment in the short run and potential growth over the medium term. For strengthening domestic demand, it is important to revive consumer and business confidence.”

The government has already announced a variety of measures include the Atmanirbhar package worth ₹20 lakh crores to provide economic support to various sectors of the domestic economy and protect the interests of vulnerable sections of society. The RBI has also been proactively managing liquidity to ensure that funds flow to all productive sectors of the nationwide economy.

In also addition, the RBI has also been easing monetary policy to reduce the cost of funds or capital to revive domestic demand.

The Governor stressed that “While all these measures should help support demand as and when the nation-wide lockdown is lifted, but 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 revitalize investment”.

RBI deputy governor and MPC member Michael Debabrata Patra also supported Governor’s view that threats to growth should be addressed “frontally and aggressively.”

He said that “In fact, my view is that the damage is so deep and extensive that India’s potential output has been pushed down, and it will take years to repair”.

Ravindra H Dholakia said during the MPC deliberations that “once the situation returns to normal and the fiscal and monetary boost measures start generating impacts, the recovering economy may require some further boost, and it is prudent to preserve some space for the future”.

Pami Dua also agreed that in order to revive growth and mitigate the economic impact of Corona-Virus, it is important to ease financial conditions further.

Pami Dua said that “in the current scenario, with heightened uncertainty and a near-standstill in economic activity, reduction in policy rates may not necessarily lead to an immediate increase in borrowing but should raise consumer confidence and investor sentiment, going forward.”

Where five members of the MPC had voted for a 40-basis points rate cut there Chetan Ghate, the only MPC member who voted to cut the policy rates by 25 basis points,

Chetan Ghate said that “However, such rate cuts should be saved for when the economy starts reviving, and not when we are in a lockdown. Rate cuts, assuming that there are transmission and banks lend, works most effectively when the economy is on the upside.”

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