Winding down liquidity to be challenge for RBI going forward: Subbarao

Ex-RBI governor says road map for fiscal consolidation starting 2022 would be prudent. Though expansionary fiscal policy is a pressing need, govt spend on health and education would benefit economy

Former Reserve Bank of India (RBI) governor D Subbarao indicated that it could become a challenge for the central bank to wind down liquidity going forward, given the excessive liquidity in the system due to monetary easing.

At an event organised by the Confederation of Indian Industry (CII), Subbarao said that a roadmap for fiscal consolidation starting 2022 would be a prudent move. He said though expansionary fiscal policy is the need of the hour, the government spending on health and education would only be beneficial for the economy. 

He also said that the Centre's fiscal deficit could be double of the fiscal deficit. The deficit was projected to be 3.5 per cent of the country's gross domestic product in the Budget. 

 

The former RBI governor said the central bank was successful in preserving the financial stability of the economy during the present crisis. He said the RBI did so by taking a three-pronged approach. The first was the extraordinary injection of liquidity through open market operations, cut in cash reserve ratio and statutory liquidity ratio. 

The second was the easing of the financial conditions through lowering of policy rates, reverse repo rates, targeted long term repo operations for specific sectors and thirdly through introduction and extension of the loan moratorium. 

Former chief economic advisor Shankar Acharya, who moderated the session, found RBI to be a little on the optimistic side when it expected the economy to recover to pre-Covid level in Q3 and Q4 showing marginal positive growth rate year-on-year.