Mumbai: The Reserve Bank of Indias representatives in the Monetary Policy Committee were near unanimous in voting for a 75 basis points reduction in interest rates as the Covid-19 impact on economy and financial markets could be enormous.
They also signalled that the central bank could deploy many tools at its disposal beyond interest rates to fuel demand revival and stabilise financial markets.While one independent member, Ravindra Dholakia, was in favour of aggressive policy initiatives along with RBI members, Chetan Ghate and Pami Dua were more reserved on the actions though they also admitted to the adverse impact.In these challenging circumstances, monetary policy has to assume an avant garde role, deputy governor Michael Patra said at the MPC meeting.
The RBI would ensure that markets dont freeze up and provide assurance that the Reserve Bank of India 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, said Patra.But the monetary policy by itself may not be effective in mitigating the crisis created by Covid-19 in a demand-deficient economy like India, said a member of the panel, recommending a smaller rate cut.Ghate had voted for only a 50 bps cut, while calling for wider structural reforms along with tax stimulus for revival of the economy, showed the minutes published on Monday.In a demand deficient economy, a large rate cut, however, will be akin to pushing on a string.
I have been raising this concern in several previous policy reviews justifying the need for more structural reforms, said Ghate, a professor at the Indian Statistical Institute (ISI).Another external member, Pammi Dua, also voted for a repo rate cut of 50 bps, but had different reasons.
It may be better to conserve some policy space for later, when the economy will require a further boost to recover from the pandemic, she said.The central bank reduced the benchmark repo rate to a record low of 4.4 per cent on March 27.Defending the RBI decision, governor Shaktikanta Das said that monetary policy needs to proactively arrest any deterioration in aggregate demand, and create enabling conditions for businesses to normalise production and supply chains.