“While managing a crisis is extremely difficult, RBI had been successful in preserving the financial stability of the economy during the present crisis” said Subbarao, the central bank is going through an extremely difficult situation when they do not have a benefit of hindsight.
Besides, managing to balance between growth and inflation ” Unwinding is going to be challenging going forward” Subbarao said speaking at the session titled ‘COVID Impact: Case for Coordinated Monetary Policy Response’ organized by CII at the Partnership Summit 2020 with Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
The central bank announced a series of liquidity easing measures as its response to the COVID-induced contraction in the economic activity since end of March this year. First was the extraordinary injection of liquidity through Open Market Operations (OMO), cut in CRR and SLR. The second was the easing of the financial conditions through the lowering of policy rates, reverse repo rates, Targeted Long-Term Repo Operations (TLTRO) for specific sectors. The third was the regulative forbearance through the introduction and extension of the loan moratorium. However, he indicated that given the excessive liquidity in the system it could become a challenge to wind down liquidity going forward.
Underscoring the need for an expansionary fiscal policy and the need for higher spending on health and education, the former RBI governor estimated that the fiscal deficit this year could be double of the level of the budgeted amount. He noted that while managing debt would be another challenge for the government, he reassured that a roadmap for fiscal consolidation starting in 2022 would be a prudent move.
Dr Subbarao explained that that though the government and central banks of the world are presently operating from the playbook of the Global Financial Crisis in 2008-09, the coronavirus crisis is quite different. He elaborated that while GFC was an asset crisis that hit the financial sector first, the coronavirus crisis first impacted the real sector.