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RBI MPC minutes: Focus on flow of finance & preserving financial stability

The RBI MPC members have unanimously agreed to go for a large cut to shield the economy from the Coronavirus pandemic and arrest the slowdown
  • The six MPC members were of the opinion that the flow of finance should continue, and efforts should be made to preserve financial stability

  • The committee said that the RBI must maintain an accommodative stance for as long as necessary to revive growth

New Delhi: The RBI (Reserve Bank of India) MPC (Monetary Policy Committee) members have unanimously agreed to go for a large cut to shield the economy from the Coronavirus pandemic and arrest the slowdown in demand. The six MPC members were of the opinion that the flow of finance should continue, and efforts should be made to preserve financial stability. They noted that the Coronavirus pandemic had not destroyed the economy’s production capabilities, and once the situation starts normalising, domestic demand would need to be stimulated without any loss of time. The MPC said that the RBI must maintain an accommodative stance for as long as necessary to revive growth in the post Coronavirus lockdown-period.

‘Despite Coronavirus, India’s macroeconomic fundamentals sound’

“While the impact of the pandemic is severe, India’s macroeconomic fundamentals continue to be sound, especially in comparison with the conditions that prevailed in the aftermath of the global financial crisis,” said RBI Governor Shaktikanta Das. “We are going through an extraordinary time and the situation currently facing the country is unprecedented. It, therefore, becomes imperative to make all-out efforts to protect the domestic economy from the adverse impact of the pandemic,” Das said and added that the Central 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.”

Liquidity measures

In consonance with these observations, the RBI came with a host of liquidity measures such as lowering the repo rate by 75 basis points and reverse repo rate by 90 basis points. While the RBI Governor, Deputy Governor Michael Patra, executive director Janak Raj, and external member Ravindra Dholakia voted for a 75 bps rate cut, external members Chetan Ghate and Pami Dua voted for a 50 bps cut. “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 macro economy,” asserted Das. “ … 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 added.

‘Setback to economic activity can be cushioned by fall in crude’

While expressing concern over the economic destruction that the pandemic is causing, especially as the nation is under a lockdown, other members of the MPC noted that the setback to the economic activity could be cushioned by the fall in oil prices. However, remittances would also decline, they added. “The MPC is 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 the Reserve Bank into the battlefront role that has to be undertaken for the greater common good,” said Patra.