Reserve Bank of India should keep its powder dry, use ammunition with caution: Former RBI governor D Subbarao

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Published: May 28, 2020 5:00 AM

Subbarao explained that one thing about the current crisis around the world is that fiscal policy has no room but it has traction while monetary policy has room but it has no traction.

Talking about the fiscal package, the former RBI governor believes the government did a reasonable job within the fiscal constraints.Talking about the fiscal package, the former RBI governor believes the government did a reasonable job within the fiscal constraints.

Former Reserve Bank of India (RBI) governor D Subbarao said on Wednesday that given the continuing uncertainty surrounding the Covid-19 crisis, the central bank should keep its powder dry and use its ammunition with caution. Subbarao was speaking at a webinar conducted by SPJIMR.

‘If I was to advice the RBI, I would say keep your powder dry. Since you have deployed quite a bit of your weaponry and you don’t know how the pandemic is going to unfold– whether it is going to be a V-shaped recovery or any other type of recovery, it might come back later. So keep your powder dry. Use whatever ammunition you have with some caution,’ Subbarao stated.

Speaking about the health of the financial services system, Subbarao indicated that the situation is quite worrisome. ‘If you throw your mind back to January, i.e. before the Covid-19 crisis hit us, we were extremely worried about our financial sector, about the health of our banks, the health of NBFCs, the level of non-performing assets, and the trust deficit in private sector banks. We were worried about all of them and all those parameters are going to get worse as we come out of this crisis,’ he said.

Talking about the fiscal package, the former RBI governor believes the government did a reasonable job within the fiscal constraints. ‘The government has been criticised for not borrowing much more. I for one believe that the government should borrow more in order to spend more. That’s a moral imperative and that is a political imperative. But I do not support the view that the government should resort to open-ended borrowing. The government cannot say that we are going to borrow whatever is necessary. It is important that the government sets itself a limit and I think they have been quite wise in setting that limit,’ he said.

Subbarao explained that one thing about the current crisis around the world is that fiscal policy has no room but it has traction while monetary policy has room but it has no traction. ‘That is the same with RBI. They have cut rates, infused liquidity but lending is not happening. Because what is constraining lending today is not interest rates or liquidity but risk aversion. RBI has done all it can but it is not able to break the impasse. That is why it was important for the government to come out with the stimulus package with guarantees and liquidity management etc.,’ Subbarao said.

Meanwhile, former deputy chairman of Planning Commission Montek Singh Ahluwalia explained the need for more clarity from the government in regard to the lockdown situation.

‘We are all assuming that when the lockdown is lifted, the economy will get back to boom. But elsewhere in the world, the lockdown is being lifted when the new cases are coming down. That’s not the case in our situation. I worry that when the lockdown is lifted, suppose the number of new cases shoots up– may be because we are testing more –, is it the policy that we are now ready to face the higher incidents of infection or is the lockdown going to get re-introduced. We need some clarity on that. Businesses are not going to ramp up production if they are not sure what the government is going to do. The more government comes out and says this is how we see the situation and this is how we are going to behave, we would be a lot better,’ Ahluwalia said.

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