Why RBI went for 35 bps cut in August MPC meet; finally, here’s the answer

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Published: August 21, 2019 6:14:04 PM

Since the economy is seeing a slowdown, a larger push is needed to drive growth, RBI governor Shaktikanta Das had said, according to the minutes of August Monetary Policy Committee (MPC) meeting.

RBI has marked out 70 instances where banks have been cumulatively fined Rs 122.9 croreTwo of his RBI colleagues and an independent member in the rate-setting Monetary Policy Committee (MPC) had also favoured a 35-basis point reduction.

Since the economy is seeing a slowdown, a larger push is needed to drive growth, RBI governor Shaktikanta Das had said, according to the minutes of August Monetary Policy Committee (MPC) meeting at which the central bank announced an unconventional 35 basis points cut to its policy rate. “The economy needs a larger push. I am, therefore, of the view that a reduction in the policy repo rate by conventional 25 bps will be inadequate. On the other hand, a 50 bps rate cut might be excessive and indicate a knee jerk reaction”, he said. A policy rate adjustment of 25 bps or multiples may not always be consistent with the evolving macroeconomic situation,” he had also said according to the minutes of the MPC released by the RBI on Wednesday.

Two of his RBI colleagues and an independent member in the rate-setting Monetary Policy Committee (MPC) had also favoured a 35-basis point reduction.  MPC members Bibhu Prasad Kanungo (RBI Deputy Governor), Michael Debabrata Patra (RBI Executive Director) and Ravindra H Dholakia (independent member) also favoured a 35-basis point cut in repo rate. Chetan Ghate and Pami Dua voted for a 25-basis points reduction in the repo or short-term lending rate.

There is a need to boost weakening domestic demand and support investment, Das also said, adding that the impact of the last three cuts can been seen gradually transmitting into the system. “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,” the minutes of the meeting said.

MPC member Pami Dua said that the ongoing trade tensions between the US and China, the monetary policy stance of major central banks recently being more dovish, and also voted for a rate cut of 25 bps to tackle slowdown. The economic outlook seems to have darkened since June policy, added Michael Patra. There is a need to use monetary policy judiciously given evolving risk, said other MPC member Chetan Ghate, while BP Kanungo said that the benign CPI outlook will continue to remain till April-June 2020 and moderation in private consumption ‘worrisome’. Ravindra Dholakia said that the RBI must look at policy transmission on home, auto loans and long-term bonds.

Meanwhile, the RBI had reduced the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 per cent to 5.40 per cent in the August bi-monthly monetary policy meeting. Consequently, the reverse repo rate under the LAF stands revised to 5.15 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 per cent. The MPC also decided to maintain the accommodative stance of monetary policy.

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