RBI’s MPC is united on rate cuts, but divided on fiscal stance, show minutes

Members of the Reserve Bank of India’s Monetary Policy Committee (MPC) voted unanimously to lower interest rates and ease the policy stance for its 6 June monetary policy review, citing concerns about economic growth.

Governor Shaktikanta Das, for instance, said there was clear evidence of economic activity losing traction, with the gross domestic product (GDP) growth in Q4 2018-19 slowing to 5.8%. The minutes of the MPC meeting, released on Thursday, show a near consensus that inflation was under control, with some mention of upside risks to food prices that may emerge if monsoons were to disappoint.

With inflation at desired levels and economic growth losing momentum, the minutes show a tilt towards a softer monetary policy, going ahead. But MPC members have mixed views about the fiscal position and government borrowing, which would influence future interest rate policy.

For instance, Viral Acharya and Chetan Ghate sounded more concerned than others about the issue. “There is, however, an important upside risk to the RBI’s projected inflation trajectory that I wish to highlight in particular—that of fiscal slippage,” Acharya said.

“Estimates of overall public sector borrowing requirement—which appropriately accounts for extra-budgetary resources and other off-balance sheet borrowings of central and state governments—have now reached between 8% and 9% of GDP. This is at a level similar to that in 2013 at the time of the ‘taper tantrum’ crisis,” he added.

On the other hand, member Ravindra Dholakia said that the concern about first, the fiscal slippage at this stage, and second, its adverse impact on inflation, in his opinion, was both misconceived and misplaced.

“Dholakia is of the view that fiscal deficit might not be pushing inflation up as the slippage is not from the expenditure side. At the other end, Ghate and Acharya feel the need to focus on implications on the fisc due to the boost in expenditures out of the high levels of off-budget borrowings. Importantly, there is a realization that the high levels of use of the National Small Savings Fund to fund the fiscal is leading to administered interest rates to stay firm – thereby impeding monetary transmission,” Indranil Pan, chief economist at IDFC Bank, said.

Economists foresee another 25 basis points rate cut in August and say further rate cuts would largely depend on what happens to inflation. One basis point is one hundredth of a percentage point.

Two weeks ahead of the budget, it’s interesting to see that the fiscal position is a concern at least in some quarters at the RBI. But as Acharya concluded, while there are upside risks to inflation, they seem highly unlikely to lead to a rate hike at the next policy.