MUMBAI: Top Reserve Bank of India officials expressed pessimism about the impact of Covid-19 on the country’s economic prospects, according to minutes of the monetary policy committee meeting released by the RBI.
Arguing for a rate cut, RBI governor Shaktikanta Das in the meeting said there was a rising probability of a sharper loss of growth momentum in the near term. Deputy governor Michael Patra said the damage is “so deep and extensive that India’s potential output has been pushed down, and it will take years to repair”.
“Looking ahead, the growth outlook has deteriorated sharply. There is still uncertainty as to when the Covid curve will flatten. Even as the supply side is expected to ease gradually as the lockdown related restrictions are phased out, it is the demand side, which will continue to weigh heavily on economic activity for some time to come,” said Das during the meeting held from May 20 to May 22, which resulted in RBI bringing down rates by 40 basis points.
“The destruction of economic activity by Covid-19 and ensuing lockdowns is much more deleterious in terms of loss of basic livelihood, economic security, health and confidence than the range of estimates/projections of GDP and other macroeconomic aggregates suggest,” said Patra. He warned that the threats to growth have to be addressed “frontally and aggressively, or risk a more dire outlook”.
Patra said that spending patterns have altered drastically away from the discretionary and to the essential. “The large monetary stimulus and fiscal effort are striving to put a floor under the aggregate demand. At the current juncture, the all-out effort is to maintain and sustain, with the hope that when life is secure, resources, energy and time can be marshalled to rebuild and revive,” he said.
Despite the destruction of demand, the MPC members pointed out that RBI surveys showed there were expectations that inflation would rise.
While the vote in favour of rate cut was unanimous among all four members, Chetan Ghate had argued for a 25 basis points cut, stating that RBI should leave some powder dry for future when there was recovery in the economy. “In a demand deficit economy, a large rate cut is akin to pushing on a string,” said Ghate.