While four of the MPC members voted in favour of the eventual 75-basis point (bps) cut, external members Chetan Ghate and Pami Dua argued for a 50-bps cut, the minutes, released on Monday, showed.
The monetary policy committee (MPC) must coordinate action with the central bank in order to maintain financial stability through interest rates and liquidity management amid disruption caused by the spread of Covid-19, the committee said in the minutes to its March meeting.
While four of the MPC members voted in favour of the eventual 75-basis point (bps) cut, external members Chetan Ghate and Pami Dua argued for a 50-bps cut, the minutes, released on Monday, showed. Dua said that the committee should leave itself some policy space for later and Ghate warned against future inflationary shocks arising from supply-side issues in the food sector.
RBI governor Shaktikanta Das wrote that space for policy action has opened up in view of the disinflationary effects of deceleration in demand under the impact of Covid-19. Weaker overall demand outlook and lower crude oil prices should keep upside risks to inflation firmly contained, even in the face of temporary supply chain disruptions and scope for opportunistic use of pricing power. Arresting risks to the growth outlook and preserving financial stability should, accordingly, receive the highest priority. The substantial rate cut, along with several other regulatory and liquidity augmenting measures announced as a part of developmental and regulatory policies on March 27 convey the resolve of the central bank to deal with the macroeconomic fallout of Covid-19 pre-emptively. “The Reserve Bank will continue to remain vigilant and will not hesitate to use any instrument – conventional and unconventional – to mitigate the impact of Covid-19, revive growth and preserve financial stability,” Das said in the minutes.
RBI deputy governor Michael Patra said that in the current circumstances, monetary policy must play an “avant garde” role by providing confidence and assuaging fear even as it fights fires on the financial front. This involves easing financing conditions for people and institutions, keeping finance flowing to all agents in the economy and ensuring that markets do not freeze up. “I believe that the MPC is being called upon to rise beyond its mandate. The MPC must show the way with the powerful decision that it wields. By doing so, it will leverage and catalyse the Reserve Bank into the battlefront role that has to be undertaken for the greater common good,” Patra wrote.
Janak Raj, RBI executive director in charge of monetary policy, observed that though it is difficult to ascertain its magnitude, aggregate demand will weaken significantly in the near future. “Therefore, the main challenge for monetary policy at this juncture is to ensure that the adverse impact of Covid-19 on domestic demand is not amplified,” Raj said in the minutes, adding: “It is also necessary to make sure that financial markets, which have been under stress with yields hardening across the maturity spectrum, do not intensify macroeconomic risks by impairing monetary transmission and giving rise to financial stability risks.”