The Reserve Bank of India’s (RBI’s) decision to cut its repurchase rate by a quarter percentage point, while maintaining its “neutral" stance, was somewhat anti-climactic, if not a surprise. Many in corporate India and the banking sector had kept their fingers crossed that the central bank, with a former bureaucrat at its helm, would either deliver a half percentage point cut or ease the cash reserve requirements of banks. Some had hoped that it would soften its policy stance to “accommodative", signalling future cuts to lower the cost of loans, spur investment and spending, and shield the domestic economy from a slowdown, especially as central banks in other major economies have taken a dovish stance in response to slowing global growth. That didn’t happen. Though equity and bond markets were disappointed, they need not despair. First, the move reveals that RBI’s Monetary Policy Committee is confident that the economy isn’t faring as badly as some economists feared. This is reflected in the vote count, with four members favouring the cut that has been made, two asking for a rate hold, and none calling for a bigger cut, which may have suggested panic over growth prospects. Second, the central bank under Shaktikanta Das, who replaced Urjit Patel as governor in the midst of a controversy over RBI’s autonomy, has opted not to make a drastic departure on this front from the earlier approach—seen by critics as not loose enough.
RBI has lowered its growth forecast for 2019-20 from 7.4% to 7.2% and noted thatthis is below the economy’s potential. While doubts persist over the accuracy of official growth numbers, directional trends can still serve as a guide. It is clear that RBI does not foresee further loss of momentum. Rather, it expects a slight uptick from the stated 7% for 2018-19. There is some evidence to support this view. Capacity utilization in the manufacturing sector improved from the 72%-oddlevels over the past few years to about 76% in the three months to December. Inflation remains in control, having stayed under RBI’s 4% target for seven months in a row. It is true that core inflation, sans food and fuel, has been sticky at more than 5%, but this could be a sign of a pick up in demand.
Before his appointment, Das had served as economic affairs secretary in the financeministry, and observers had wondered aloud if he would do the government’s bidding. A big rate cut—say, twice the size just executed—might have been interpreted in some quarters as a politically motivated move aimed atburnishing Prime Minister Narendra Modi’s image as a business-friendly leader. That would have harmed the central bank’s reputation, given the fire it came under for going along with the centre on demonetization in 2016, despite the reservations it had. The fact that Patel had left at the time he did—with RBI’s differences with the government over a swathe of issues going public—would have been recalled by critics to question the integrity of India’s foremost financial institution. That reputational risk now appears to have receded. He has delivered a couple of matching cuts in each of the two policy meetings he has presided over so far. With inflation benign and growth in some trouble, neither has been hard to justify. This is to the credit of Das.