Signs of normalcy in economy, says RBI chief

India’s economy has started to show signs of normalcy with easing of COVID-19-related lockdown restrictions, however “a very careful trajectory” has to be followed after the containment of the pandemic, according to Reserve Bank of India (RBI) Governor Shaktikanta Das.
The economy’s medium-term outlook remains uncertain even though the country has started re-opening after over two months of a nationwide lockdown, as demand and supply shocks due to the coronavirus still loom large, Mr. Das said in his keynote address at the seventh SBI Banking and Economics Conclave.
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.
Economic growth is the “topmost priority” for the central bank and “equal priority has to be given to financial stability”, the RBI Governor said, describing the coronavirus pandemic as “the worst health and economic crisis in the last 100 years during peacetime”.
Policy measures undertaken by the RBI appear to have worked so far, but going forward, the situation would need even more careful assessment, the RBI Governor said.
“Banks and other financial entities are today at the forefront of the country’s counter-measures against the economic impact of COVID-19. They are the transmission channels for the RBI’s monetary, regulatory and other policy measures… and also the implementation vehicles for the financial backstop measures announced by the government,” the RBI Governor said.
While the multi-pronged approach undertaken by the RBI has provided a cushion from the immediate impact of the coronavirus pandemic on banks, the economy’s medium-term outlook is uncertain and depends on the COVID-19 curve, Mr Das said.
“Policy action in medium-term would require a careful assessment of how the crisis unfolds,” he said, adding that building buffers and raising capital will be crucial not only to ensure credit flows but also to build resilience in the financial system.
The country’s banking and financial system is capable of rising to the occasion in meeting this challenge, he asserted. In these challenging times, banks have to improve their governance and sharpen their risk management, he said.
Banks will also have to raise capital in an anticipatory basis instead of waiting for a situation to arise, Das noted. The economic impact of the pandemic due to the lockdown and anticipated post-lockdown compression in economic growth may result in higher non-performing assets and capital erosion of the banks, Mr Das cautioned.
A recapitalisation plan for public and private sector banks has therefore become absolutely necessary, he said.