Money & Banking

Most members of RBI’s monetary policy committee see scope for more rate cuts

Our Bureau Mumbai | Updated on February 20, 2020 Published on February 20, 2020

While unanimously voting to maintain a status quo on the policy repo rate, most members of the monetary policy committee (MPC) were of the view that the powder needs to be kept dry for a future rate action, going by the minutes of the committee’s meeting.

The RBI kept its policy repo rate (the interest rate at which it provides funds to banks to overcome short-term liquidity mismatches) unchanged at 5.15 per cent in its six bi-monthly monetary policy review, which was announced on February 6.

Chetan Ghate, Professor, Indian Statistical Institute, said, “If growth has not revived with a 135 basis points (bps) cut in the policy rate, and a tax stimulus amounting to 1.2 per cent of GDP, then the need of the hour is more structural reform.

“Having said this, fiscal deficit uncertainty may require the MPC to accept tighter-than-desired monetary conditions to ensure our commitment to the medium-term inflation target.”

Ghate observed that monetary policy continues to be well positioned. While the professor didn’t see space for further cuts going forward, he remained data-dependent.

Pami Dua, former director, Delhi School of Economics, observed that to address growth in the economy, there is merit in adopting a wait-and-watch approach. This will allow for the pending monetary transmission to be realised in the near future.

Growth initiatives

Further, measures already undertaken by the government to address growth slowdown are expected to play out, including the fiscal stimulus in the form of a major overhaul in corporate income tax aimed at reducing the overall tax burden on corporates and, in turn, improving India’s global competitiveness. Moreover, growth initiatives announced in the Budget are also expected to pan out slowly.

Ravindra H Dholakia, former Professor, Indian Institute of Management, Ahmedabad, opined that the Budget has presented a fiscal policy of the Centre that borders on being contractionary rather than expansionary on misplaced concerns about fiscal slippage in the face of a serious growth slowdown.

Under such circumstances, the monetary policy should preserve policy space for any rate action at an appropriate time, he added.

“While monetary policy is important for short-run revival of aggregate demand, the long-term growth revival depends critically on the fiscal policy and structural reforms.

“When the long-run revival is not seriously attempted, any substantial recovery in the short run is also likely to be elusive and the monetary policy stimulus that works only indirectly and with lags is also likely to be less effective,” said Dholakia.

Janak Raj, Executive Director, RBI, said while current low growth is the outcome of deficient demand, high inflation is an upshot of a supply shock. These conflicting dynamics pose a challenge for monetary policy. Weak demand conditions warrant further monetary policy easing, while elevated inflation and the highly uncertain inflation outlook call for a cautious approach.

Raj emphasised that there is policy space, which could be used once the inflation outlook becomes clear.

Michael Debabrata Patra, Deputy Governor, said: “The pre-emptive easing of monetary policy since February 2019 is now turning out to be fortuitous... Monetary policy has headroom to respond to the evolving macroeconomic configuration, but a good fix is needed on the shape of the inflation hump it has chosen to look through.”

He observed that the endeavour now should be to improve transmission of the cumulative 135 bps rate reduction effected since February 2019 and seize the opportunity when it opens up to act judiciously and effectively to support the economy.

Focus on growth

Shaktikanta Das, Governor, said considering the overall evolving growth-inflation situation, it would be prudent to continue the focus on growth in the context of the expected moderation in inflation. Barring the intensification of global risks, there is policy space that needs to be timed optimally and opportunistically to maximise its impact on growth, he added.

Published on February 20, 2020
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