Money & Banking

MPC panel voted for rate cut to restore consumer confidence, investor sentiment

Our Bureau Mumbai | Updated on April 13, 2020

With the domestic economy getting impacted due to the global outbreak of Covid-19, restoring the confidence of producers, consumers and investors has become a priority for the Reserve Bank of India (RBI), prompting it to go for a sizable reduction in the policy repo rate.

The discussion of the Monetary Policy Committee (MPC) meeting, held on March 24, 26 and 27, revolved around Covid-19 and ways to revive growth and mitigate the impact of the pandemic on the economy. In fact, Covid-19 has been cited 55 times in the minutes of the meeting released by the RBI on Monday.

All members voted for a reduction in the policy repo rate, with four voting for 75 basis points cut in the repo rate and two voting for 50 basis points. The RBI cut the rate by 75 basis points (bps) to 4.40 per cent from 5.15 per cent on March 27.

MPC member Chetan Ghate, Professor, Indian Statistical Institute, observed that taking monetary policy, fiscal policy, social insurance policy and liquidity policy together, a 50 bps cut in the policy rate is appropriate at the current juncture.

Fiscal stimulus

Ghate felt that the ideal fiscal stimulus to deal with Covid-19 should be loaded on the tax side rather than the government spending side. “India, however, has limited tax penetration. This is going to be the main design challenge,” he said.

Pami Dua, former Director, Delhi School of Economics, emphasised that the top-most priority should be to minimise the negative impact of the pandemic on economic growth. “Given the extraordinary crisis, in order to revive growth and mitigate the economic impact of Covid-19, a sizable reduction in the policy repo rate is clearly warranted. Accordingly, I vote for cutting the policy rate by 50 basis points.

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

Ravindra H Dholakia, former Professor, Indian Institute of Management, Ahmedabad, noted that this is the right time for the MPC to act decisively and for RBI to provide a major booster dose to the economy to restore the confidence of producers, consumers, investors and savers.

Demand to weaken

Janak Raj, Executive Director, RBI, said it is clear that aggregate demand will weaken significantly in the near future, which will impact the growth prospects for the year as a whole. Therefore, the main challenge for monetary policy at this juncture is to ensure that the adverse impact of Covid-19bon domestic demand is not amplified.

MD Patra, Deputy Governor, felt that in these challenging circumstances, 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.

“This involves easing financing conditions for people and institutions, keeping finance flowing to all agents in the economy, ensuring that markets do not freeze up, providing the assurance that the RBI is at the forefront in the war against Covid-19 and will use all instruments at its command to fight the virus and mitigate its fall out,” explained Patra.

Shaktikanta Das, Governor, cautioned that the erosion of consumer confidence and investment sentiment can operate in an adverse feedback loop to worsen the growth outlook even further. “In this emerging scenario, monetary policy needs to proactively arrest any deterioration in aggregate demand, and thereby create enabling conditions for businesses to normalise production and supply chains as and when the situation becomes conducive for resumption of economic activity,” said Das.

He added that the space for policy action has opened up in view of the disinflationary effects of deceleration in demand under the impact of Covid-19.

Published on April 13, 2020

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