(Photo: Mint)
(Photo: Mint)

RBI’s MPC votes for saving some ammunition as transmission lags

  • Concerned about the slowdown, MPC members vote unanimously for a rate cut
  • With transmission lagging, the members recommend using monetary policy in a calibrated manner

Akin to its decision in the June monetary policy meeting, members of the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) voted unanimously to lower interest rates and ease the policy stance in its 7 August monetary policy review. Only this time, the central bank cut the repo rate by an unconventional 35 basis points (bps). A basis point is one-hundredth of a percentage point.

Four out of the six MPC members voted for a 35 bps rate cut to counter the economic slowdown, while members Pami Dua and Chetan Ghate stuck to the traditional 25 bps prescription. But delayed transmission is playing a spoilsport here. “Cumulative repo rate reduction of 75 bps, effected since February 2019, has so far resulted in 29 bps reduction in weighted average lending rate (WALR) of banks on fresh rupee loans. This is considered inadequate even though the transmission is expected to improve, going forward," said Bibhu Prasad Kanungo, RBI deputy governor and MPC’s new member.

With transmission lagging behind, Ghate suggested using the monetary policy judiciously. “By a large cut (35bps) 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," he said.

Also, there is still limited clarity on how deep this economic slowdown is—be it domestic or global. So, the committee members suggested that future rate cuts should be calibrated to tackle a scenario of a sharper downturn, going forward.

(Naveen Kumar Saini/Mint)

According to RBI executive director and MPC member Michael Debabrata Patra, the 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," he said.

Although MPC member Ravindra Dholakia was the most dovish, calling for a 40 bps rate cut, he went with the consensus vote for a 35 bps cut, agreeing to keep some space for future exigencies.

Since the August policy, not much has improved either on the domestic or global front. In fact, some economists see downside risks to RBI’s FY20 gross domestic product (GDP) forecast. It should be noted that earlier this month, the six-member MPC had lowered its FY20 GDP growth forecast from the earlier 7% to 6.9%. Economists see limited room for rate cuts, and are working with estimates of 15-25 bps rate cut going ahead.

That said, the onus to revive the economy can’t be on the central bank’s shoulders alone. The government has to work hand-in-hand with its fiscal measures. As Ghate said: “Going forward, policy coordination between monetary and fiscal policy will be crucial for a healthier and more durable growth-inflation mix in the economy."

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