Signs Of Normalcy In Economy But Medium-Term Outlook Uncertain: RBI Chief

RBI Governor Shaktikanta Das said the COVID-19 outbreak is "unambiguously the worst health and economic crisis in the last 100 years during peacetime".

RBI Governor Shaktikanta Das said the economy's medium-term outlook depends on the COVID-19 curve

Reserve Bank of India (RBI) Governor Shaktikanta Das on Saturday said the country's economy has started showing signs of normalcy with easing of more than two months of COVID-19-related lockdown restrictions, but its medium-term outlook remains uncertain. Supply chains and demand are yet to be restored fully while the trajectory of the spread of the coronavirus pandemic and the length of its impact remain unknown, Shaktikanta Das said, describing the COVID-19 outbreak has "unambiguously the worst health and economic crisis in the last 100 years during peacetime".

Here are 10 things to know:

  1. The RBI's policy responses with a multi-pronged approach appear to have worked so far, but the situation would need even more careful assessment going forward, said the RBI Governor in his keynote address at the seventh SBI Banking and Economics Conclave.(Read Full Text Here)

  2. Economic growth is the "topmost priority" for the central bank and "equal priority has to be given to financial stability", the RBI Governor said. His comments come at a time when most economists expect India to register a record contraction of 4.5 per cent or more in the current fiscal year due to the coronavirus.

  3. The financial sector should return to normal functioning without relying on regulatory relaxation as the new norm. "Indian economy has started showing signs of going back to normalcy after easing of restrictions," Mr Das said.

  4. Starting late March, the country was placed under one of the strictest lockdowns in the world for over two months. Since early June, the government has started easing restrictions to help some revival in the economy even though the number of infections in the country continues to rise. (Also Read: COVID-19 Worst Health, Economic Crisis In Last 100 Years, Says Shaktikanta Das)

  5. "The COVID-19 pandemic, perhaps, represents so-far the biggest test of the robustness and resilience of our economic and financial system," Mr Das said. "Banks and other financial entities are today at the forefront of the country's counter-measures against the economic impact of COVID-19."

  6. The COVID-19 outbreak has "dented the existing world order, global value chains, labour and capital movements across the globe, and, needless to say, the socioeconomic conditions of large sections of the world population". He said the 2008 global financial crisis and the current situation show that such economic shocks have "fatter tails" than generally believed.

  7. The Governor reiterated that the RBI has taken a number of important measures, conventional and unconventional, to boost the financial system and support the economy against the crisis. The RBI has announced liquidity measures worth Rs 9.57 lakh crore since February this year, equivalent to 4.7 per cent of the country's nominal GDP in 2019-20, he pointed out.

  8. Mr Das warned that the damage caused by COVID-19 may lead to higher non-performing assets - or bad loans - and capital erosion in banks, which will have to raise capital in an anticipatory basis. This makes a recapitalisation plan for the country's banks - both private and public - necessary, and lenders also have to improve governance and sharpen their risk management, he said.

  9. Mr Das said that the central bank has to carefully unwind the unusual monetary and regulatory measures taken to cushion the economic shocks in the post pandemic world, as the financial sector should return to normal functioning without relying on the regulatory relaxations as the new norm. Inflation will continue to moderate going forward and investment activity will revive, he said.

  10. The RBI had already switched to an "accommodative" stance before the onset of the COVID-19 outbreak, its Governor said. While an "accommodative" stance eradicates the possibility of stricter monetary policy measures such as a rate hike, a "neutral" stance means the central bank can move either way. He highlighted that the RBI has cut the repo rate by a total 250 basis points (2.5 percentage points) since February 2019. The repo rate - or the key rate at which the RBI lends money to commercial banks - is currently at 4 per cent, the lowest since 2000.