Money & Banking

‘Slowdown, weak consumer sentiment prompted the RBI to cut rate by 25 bps’

Mumbai | Updated on October 18, 2019 Published on October 18, 2019

Experts see space for further cut in repo rate to boost domestic growth

In the face of continued slowdown in economic activity and weak business and consumer sentiment, all six members of the monetary policy committee (MPC) recommended a cut in the policy repo rate, as per the minutes of the committee’s meeting released by the Reserve Bank of India (RBI) on Friday.

While five members of the MPC recommended a 25 basis point (bps) cut in the policy repo rate, Ravindra Dholakia, former professor, Indian Institute of Management, Ahmedabad, pushed for a larger 40 bps cut to boost growth. Eventually, majority opinion prevailed, with the RBI cutting the policy repo rate by 25 bps from 5.40 per cent to 5.15 per cent on October 4.

Accommodative stance

Benign retail inflation and the expectation that it will remain below the 4 per cent target proved to the clincher in the rate-cut decision. All members voted for continuation of the accommodative monetary policy stance, with four specifically stating that this stance continue until the economic activity is reinvigorated.

Chetan Ghate, Professor, Indian Statistical Institute, observed that growth impulses continue to be weak. Given this, the MPC has been pro-active in adjusting policy as reflected in the quantum of past rate cuts.

He opined that “monetary policy, however, cannot be a permanent form of stimulus. As Lawrence Lindsey says in his book, The Growth Experiment Revisited (Basic Books, 2013), monetary policy should lean against the wind and help stabilise the business cycle. But it cannot become the wind itself, particularly one that blows at gale force.”

Slowdown blues

Referring to the slowdown in growth on the domestic and global fronts, along with benign headline inflation and the expectation that it will remain below target, Pami Dua, Director, Delhi School of Economics, felt that there is policy space to further cut the policy repo rate to boost domestic growth within the flexible inflation targeting mandate.

Dholakia said in spite of late efforts by the RBI and Central government to provide the monetary and fiscal boost, it appears that growth recovery may take longer than expected.

“In my opinion, we need to maintain accommodative stance with possible rate action till growth recovers provided the inflation remains within the target...enough space exists...for a 40 bps reduction in the policy repo rate now with space still existing for future till growth recovers,” explained the former IIM professor.

MD Patra, Executive Director, RBI, underscored that downturn in the economy, and especially in spending, may be deeper and more pervasive than expected.

“In its counter-cyclical role, monetary policy has to be pre-emptive in addressing the negative gaps – inflation below target, and output below potential – that seem to be developing some persistence. Available space for policy action has to be calibrated to secure the closure of the gaps,” he said.

BP Kanungo, Deputy Governor, RBI, said the slowdown in GDP growth in the recent period has been underpinned by deficient domestic demand. As inflation is projected to remain below the target of 4 per cent till the first quarter of 2020-21, policy space is available to support growth, he added.

Shaktikanta Das, Governor, RBI, said continuing slowdown of the economy requires all-out efforts to strengthen private consumption and investment.

“As the inflation scenario remains benign with headline inflation projected at below target in the remaining period of 2019-20 and Q1 of 2020-21, there is policy space to address growth concerns,” the Governor said.

Published on October 18, 2019
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