RBI MPC minutes: Worries about growth increase
Will India’s private investment revive and will the economy get its animal spirits back? And what does this imply for future policy rate cuts? The minutes of the latest monetary policy committee (MPC) meeting show that the answer to the first question has a higher chance of being in the negative. They show that the members have become more worried about growth than they used to be.
Unlike in June when he felt that the downside impulses of growth are due to demonetisation and transient, Chetan Ghate is now worried over the slowing rate of capital formation. He feels that a prolonged period of weak investment growth will impact potential growth and the output gap will remain negative even in the second quarter of fiscal year 2018. Ghate’s comments on inflation have remained largely unchanged although he did point to the reduced upside risks to inflation.
Ghate’s worry finds resonance even with Reserve Bank of India (RBI) governor Urjit Patel, who points out yet again the absence of a revival in the investment cycle and the downside risks to growth in both industries and services. Unlike in the previous meeting’s minutes, the governor this time around does not mention robust private consumption expenditure. Both Patel and his deputy Viral Acharya batted for fixing the twin balance sheet problem of overextended corporate borrowers and banks weighed down by bad loans to bring back those animal spirits. Pami Dua too voiced concern about weakening industrial growth due to subdued demand conditions and links it to infrastructure bottlenecks, apart from the twin balance sheet problem.
The minutes show that MPC members including governor Patel are finding common ground with Arvind Subramanian, the government’s chief economic adviser, even though they may not agree with his policy prescription.
Ravindra Dholakia and RBI executive director Michael Patra are dovish and hawkish, respectively. The other MPC members sound less sanguine on growth than they did before. Dholakia stuck to his script for a deeper 50 basis points policy rate cut, citing weakening growth and fast receding inflation. Patra steered clear of any mention of weak capital formation or decelerating growth. He on the other hand pointed out that every official forecast for growth is on the higher side for FY18.
There are a few clues in the minutes about future rate cuts. Even though growth seems to be getting greater attention, enough ink has been spilled on inflation as well. The strongest voice is of course Patra’s and the latest Consumer Price Index inflation print for July adds credibility to his hawkish stance. Other members too stressed upside risks to inflation, mainly the threat of fiscal slippages through farm loan waivers.
As Gaurav Kapur, economist at IndusInd Bank Ltd, observes, the rise in core inflation as well as the worries over growth conditions would weigh heavily on the policy decision in October.