RBI’s “whatever is necessary” moment arrives…

What a tough time Mr Shaktikanta Das is having! He has been dealing with so many crises ever since his appointment in Dec-2018. But the latest one of dealing with Covid19 crisis will surpass all challenges.

There was criticism that RBI has not cut policy rates where other central banks have thrown whatever possible at the crisis. As per RBI Act, only the MPC can take the interest rate decision. The Act specifies the following:

45ZI. Meetings of Monetary Policy Committee.
(1) The Bank shall organise at least four meetings of the Monetary Policy Committee in a
year.
(2) The meeting schedule of the Monetary Policy Committee for a year shall be published by the Bank at least one week before the first meeting in that year.
(3) The meeting schedule may be changed only––
(a) by way of a decision taken at a prior meeting of the Monetary Policy Committee; or
(b) if, in the opinion of the Governor, an additional meeting is required, or a meeting is required to be rescheduled due to administrative exigencies.
(4) Any change in meeting schedule shall be published by the Bank as soon as practicable

This was clearly a call taken by the RBI Governor. Perhaps he could have taken the decision a little earlier.

In this meeting under exigencies, RBI has lowered policy repo rate by 75 bps to 4.4%. It has also taken several measures to support the banking and financial markets.

I am surprised that the MPC members did not agree to a deeper cut of 100 bps. Infact, there was a split with 4 members voting to cut rates by 75 bps and 2 members by 50 bps.

All members voted for a reduction in the policy repo rate and maintaining the accommodative stance as long as it is necessary to revive
growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.

Dr. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted for a 75 bps reduction in the policy repo rate.
Dr. Chetan Ghate and Dr. Pami Dua voted for a 50 bps reduction in the policy repo rate.

The MPC also stated it will do “whatever is necessary”:

The MPC is of the view that macroeconomic risks, both on the demand and supply sides, brought on by the pandemic could be severe. The need of
the hour is to do whatever is necessary to shield the domestic economy from the pandemic. Central banks across the world have responded with monetary
and regulatory measures – both conventional and unconventional.  

Governments across the world have unleashed massive fiscal measures, including targeted health services support, to protect economic activity from
the impact of the virus.

The virus has just changed so many things. It questions whatever edifice and protection humans have built over centuries…

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