Money & Banking

‘There is nothing sacrosanct about rate action only in multiples of 25 bps’

Our Bureau Mumbai | Updated on August 08, 2019

Shaktikanta Das , Governor, Reserve Bank of India




The Reserve Bank of India, on Wedneday, announced an unconventional 35 basis points cut in the policy repo rate from 5.75 per cent to 5.40 per cent in the backdrop of weak domestic economic activity. The six-member monetary policy committee observed that addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate. During an interaction with the media, Governor Shaktikanta Das said considering the evolving macro-economic outlook, the RBI has been pre-emptive in its monetary policy actions and stance. Excerpts:

Why did you cut the repo rate by 35 bps?

In view of the evolving economic situation and MPC’s assessment about demand and investment, it was felt that 25 basis points cut was inadequate. But 50 basis points cut would have been excessive. That is why a balanced call was taken.

Why is 50 bps cut considered excessive?

In policy-making, you take a call. Now, when you take a call, there is something more than mere numbers. Numbers are important. Numbers are paramount. [Based on] our assessment of the incoming data…we have given our projection for inflation, growth and other areas also. We have an appreciation, we have an assessment of the incoming data. But finally when you take the decision…you need to take a call, which is a little beyond what is there just in the data. It is something more. So, therefore, the MPC, in its considered opinion, took the view that 35 basis points cut is adequate. I have articulated earlier also that there is nothing sacrosanct about rate action being only in multiples of 25 bps. It has just been adopted and it has become the convention. So, therefore, when you do something a little out of convention, too much should not be read into it. So, it is a judgment call which the MPC has taken. And let me once again say that there is nothing sacrosanct about 25 bps or multiples thereof.

What is RBI’s underlying understanding of what is happening in the economy?

There is a demand and investment slowdown. Both put together are having a sort of dampening effect on growth. We have ourselves reduced our growth projection (for FY20) to 6.9 per cent (from the earlier projection of 7 per cent), with risks slightly to the downside. Now, to go into whether it is a structural or a cyclical or is a momentary thing, that is an aspect which requires deeper analysis.

What is the real interest rate that RBI is working with?

This is not the time to look at real interest rates. Currently, our focus is to meet the output gaps…. So, that is what is the determining factor with regard to the MPC’s decision.

What are the concerns of banks when it comes to passing on the rate cuts?

I have had meetings with both public and private sector banks in two separate sittings. And the system is today also flush with liquidity. So, therefore, the rate cuts done by the RBI and the liquidity which we have injected both have now initiated the cycle of rate cuts so far as fresh loans from banks are concerned. We have a sense that there will be improvement (in transmission of repo rate cut to lending rates). RBI is monitoring it regularly. And in future whatever steps are required to sort of ensure faster transmission of rates, we will not hesitate to take those steps.

Published on August 07, 2019

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