With inflation projected to remain stable, a further reduction in rates needs to be given priority, says Das
There is a need for monetary policy action to support economic activity, close the output gap
Mumbai: Members of the Reserve bank of India's Monetary Policy Committee at its rate review held on 7 August have agreed that supporting growth will remain their top priority in the midst of inflation remaining stable within the next one year, according to the minutes of the meeting released on Wednesday.
Governor Shaktikanta Das, who voted for a 35 basis point cut, said that, “With headline inflation projected to remain within the target over the next one-year horizon, supporting domestic growth by further reducing interest rates needs to be given the utmost priority."
Earlier this month, the MPC cut repo rates for a fourth time this year to 5.4% and lowered its forecast for gross domestic product growth to 6.9% for the year to March from 7%.
Das explained that the economy needed a larger push and that a 35 basis point cut could help quicken the impact of the past cumulative rate reduction of 75 basis points. “Given the current and evolving inflation and growth scenario at this juncture, it can no longer be a business as usual approach," he added.
RBI Deputy Governor B.P. Kanungo who also voted for an unconventional 35 basis points cut, said that there is a need for monetary policy action to support economic activity and close the output gap. Kanungo said headline inflation is expected to remain below 4% for next four quarters
RBI executive director in charge of monetary policy, Michael Patra, however, believed that the space for monetary policy action has to be calibrated, especially as the nature and depth of the slowdown is still unraveling and elbow room may be needed if it deepens. “A more broad-sided response involving all levers of policy acquires the highest priority now. The overarching goal is to reinvigorate domestic demand and the time to do it is now," he said.
Chetan Ghate, an external member of the MPC, who had voted for 25 basis points cut, explained that the MPC should wait for more transmission before going ahead with an aggressive rate cut. “By a large cut (35 bps) 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 added.
Ravindra Dholakia, a dovish member, said that a 35 basis point cut will correct high real interest rates to revive growth. “Given that there is a significant policy space to correct the real rate of interest and thereby helping the economic activities to recover, it is prudent in my opinion to cut the policy rate somewhat aggressively but cautiously keeping some space for future exigencies," he said.
With inflation expected to remain benign amid slowing consumption and investment growth, which threatens to further slow down economic growth, MPC’s focus has now fully shifted from combating inflation to boosting aggregate demand. The central bank has traditionally balanced its policy narrative between growth imperatives and inflation management, but the policy focus now seems solely reassigned to minimizing the negative output gap.
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