Monetary Policy Committee (MPC) minutes of the unscheduled March 27th RBA Policy meet came out yesterday. The language of the Monetary Policy Committee (MPC) minutes was enough to give an eerie feeling. There appeared to be a way deep uncertainty among the many MPC members on how the COVID-19 pandemic is likely to pan out in the Indian economic system. Now India’s central bank Reserve Bank of India is deeply aware of its limitations in fighting COVID-19. But it’s prepared to go far into the uncharted territory to protect development and monetary stability.
In the words of Michael Patra deputy governor of the Central Bank of India (RBI). The coronavirus, ‘danse macabre’ meaning the dance of death is taking a catastrophic toll on human life causing economic disruptions and in these challenging circumstances. Monetary policy has to assume an ‘Avant Garde’ this means the MPC will assume high guard ready to experiment and innovate. In the March 27th policy the MPC unleashed a bazooka delivering a significant 75 basis points cut in repo rate. The repo rate at which banks get short-term money from the Reserve Bank of India.
While all the six members of the monetary policy committee voted in favor of a rate cut two members voted for 50 basis points cut. While all the remaining members voted for 75 basis points. Now the general mood of the MPC members was pessimistic about economic recovery. The minutes pointed out that there is a rising probability that large parts of the global economy will slip into recession. Perhaps RBI governor Shaktikanta Das has a comment about the current pandemic led situation summarized the intent of the RBI. He said it has become imperative to make all our efforts to protect the domestic economy from the adverse impact of the pandemic, arresting risks to growth outlook and preserving monetary stability ought to accordingly receive the best priority.
This supports the series of unconventional measures the central bank announced such as the targeted long-term repose the TLTROs (targeted longer-term refinancing operations) along with the rate cut. These are to push banks to buy corporate bonds making it easier for non-bank lenders and other companies to raise money. The Reserve Bank of India additionally cuts the Cash Reserve Ratio by a 100 basis points to 3% with impact from March 28 unlocking the 1.37 lakh cr. rupee primarily in liquidity in the banking system.
What was comforting though was that RBI governor Shaktikanta Das said the macroeconomic fundamentals of the economy continued to be sound, especially in comparison with the conditions that prevailed in the aftermath of the global financial crisis. RBI Deputy Governor, Michael Patra believes that the lockdowns across multiple states would lead to in a pointy widening of the output gap. He also believes that inflation is likely to soften, sooner and faster all these portents to more rate cuts going ahead.
While relatively speaking the Reserve Bank of India hasn’t done much compared to the other central banks such as the US Federal Reserve and the Bank of England, which have essentially resorted to print and spend. The Monetary Policy Committee minutes hinted at the limitations of the central bank’s infighting external shocks but also emphasized that COVID-19 is a global crisis, and warrants action beyond the remit of monetary policy within the country and across the globe.