Former RBI Governor D Subbarao has said that while managing a crisis is extremely difficult and the Reserve Bank of India (RBI) had been successful in preserving the financial stability of the economy during the present coronavirus disease (covid-19) pandemic. He noted that all actions of the central bank 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. He added that though governments and central banks of the world are presently operating from the playbook of the Global Financial Crisis (GFC) in 2008-09, the coronavirus crisis is quite different.
Subbarao has pointed out that while GFC was an asset crisis that hit the financial sector first, the coronavirus crisis first impacted the real sector. He also said there were certain key elements to the central bank's monetary policy response so far. He noted that she 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, Former RBI Governor has 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 pointed out that 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.