RBI has preserved financial stability of economy during Covid: Subbarao

Former RBI Governor D Subbarao said that managing a crisis of this scale is extremely difficult

Former RBI GovernorD Subbarao on Wednesday said that managing a crisis is extremely difficult and the central bank had been successful in preserving the financial stability of the economy during the present COVID-19 crisis.

Addressing a virtual event organised by industry body CII, Subbarao noted that all actions of the RBI were driven by the dual objective of achieving financial stability and preventing a financial crisis, and secondly, transmitting money to productive sectors of the economy.

"While managing a crisis is extremely difficult, the RBI has been successful in preserving the financial stability of the economy during the present COVID-19 crisis," he said.

Subbarao noted that though governments 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.

"While GFC was an asset crisis that hit the financial sector first, the coronavirus crisis first impacted the real sector," he pointed out.

The former RBI Governor said there were certain key elements to the central bank's monetary policy response so far.

"The 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," he said.

Subbarao,however, opined that given the excessive liquidity in the system it could become a challenge to wind down liquidity going forward.

Noting that though expansionary fiscal policy is the need of the hour and government spending on health and education would only be beneficial for the economy, he said the fiscal deficit this fiscal could be double of the budgeted fiscal deficit target.

He pointedoutthat managing debt would be another challenge for the government, and suggested that a roadmap for fiscal consolidation starting in 2022 would be a prudent move.