MPC members differed on quantum of rate cut

While all six members of the monetary policy committee (MPC) were on the same page on cutting the policy repo rate to deal with economic slowdown, they differed on the quantum, with four recommending an aggressive 35 basis points (bps) cut and two pushing for a calibrated 25 bps cut.

Ultimately, the Reserve Bank of India announced a 35 bps cut in the policy repo rate from 5.75 per cent to 5.40 per cent on August 7 in its third bi-monthly monetary policy review.

As per the minutes of the MPC meeting, Chetan Ghate, Professor, Indian Statistical Institute, who recommended a 25 bps repo rate cut, said: “By a large cut (35 bps), I feel, we will be burning through monetary policy space without much to show for it.

“While the real economy needs some support, we should wait for more transmission to happen. Given the evolving growth-inflation risk picture, monetary policy should be used judiciously.”

Fiscal imbalances

Ghate underscored that he continues to worry that fiscal imbalances embodied in the large public sector borrowing requirement (roughly 8-9 per cent of GDP) will lead to detrimental outcomes for the economy.

The professor observed: “I will carefully watch the evolving growth-inflation risk picture. Estimates of economic growth in India have unfortunately been subject to a fair degree of floccinaucinihilipilification (the action or habit of estimating something as worthless).

“Notwithstanding this, growth is likely to pick up from Q2 (July-September)-Q3 (October-December) 2019-2020.”

Suggesting a 25 bps repo rate cut, Pami Dua, Director, Delhi School of Economics, said while monetary policy can impact cyclical factors, it has its limitations with respect to significantly impacting structural factors.

Therefore, investment-focussed fiscal policy and active continuation of structural reforms are imperative at this juncture, to complement the already substantial easing that has been delivered since February 2019. Ravindra H Dholakia, former professor, Indian Institute of Management, Ahmedabad, said since he did not see any major threat to inflation in the foreseeable future, he would like to vote for a 35 bps cut in the policy repo rate to correct high real interest rates in order to enhance investment sentiments and revive growth impulses.

Michael Debabrata Patra, Executive Director, RBI, observed that in India, negative gaps have opened up in respect of both output and inflation, warranting an appropriate policy response.

“Monetary policy has been proactive and front-loaded as the first line of defence. From here on, the space for monetary policy action has to be calibrated to the evolving situation, especially as the nature and depth of the slowdown is still unravelling and elbow room may be needed if it deepens.

“A more broad-sided response involving all levers of policy acquires the highest priority now. The overarching goal is to reinvigorate domestic demand and the time to do it is now,” said Patra.

Bibhu Prasad Kanungo, Deputy Governor, said given the benign inflation outlook that is expected to continue for the rest of the year and up to Q1 (April-June) 2020-21, he is of the view that there is a need for monetary policy action to support economic activity and close the output gap.

Investment activity

In view of weakening of domestic growth impulses and unsettled global macroeconomic environment, Shaktikanta Das, Governor, felt that there is a need to bolster dwindling domestic demand and support investment activity, even as the impact of past three rate cuts is gradually working its way to the real economy.

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