In its May policy review, the MPC had refrained from offering a specific level for growth in gross domestic product (GDP) while pegging it to be in negative territory for FY21.
The monetary policy committee (MPC) must frontload rate actions in view of the rapidly deteriorating economic outlook, Reserve Bank of India (RBI) governor Shaktikanta Das wrote in the minutes of the policy meeting held on May 20-22, explaining the reason behind advancing the meeting scheduled for June 3-5.
Das wrote that since the last off-cycle MPC meeting on March 27, macro-financial conditions had deteriorated rapidly. “The benign inflation outlook that is expected for the second half of 2020-21, coupled with the rising probability of a sharper loss of growth momentum in the near-term, has provided us with more policy space to ease financial conditions further and stimulate growth. Since the outbreak of Covid-19, the MPC has voted for front-loading its actions. In view of the deteriorating outlook, it is critical to reinforce these actions in sync with the space provided by the underlying conditions,” he said.
Deputy governor Michael Patra painted a far bleaker picture of the growth outlook and said that India’s growth was likely being set back on a more permanent basis. “In fact, my view is that the damage is so deep and extensive that India’s potential output has been pushed down, and it will take years to repair,” Patra said, adding, “In the deliberations of the MPC, my view is that the threats to growth have to be addressed frontally and aggressively, or risk a more dire outlook.”
At the same time, Patra made a case for calibrating the quantum of the rate cut to the space opened up by the inflation outlook, after allowing for margins of error in these fluid and uncertain times, while keeping in mind the ramifications of the size of the rate reduction for financial stability. While the MPC has predicted a benign trajectory for inflation, its surveys on household expectations of inflation, the results of which were released on Thursday, showed that median inflation perception and expectations increased sharply in May 2020 as compared with the March 2020 round of the survey.
In its May policy review, the MPC had refrained from offering a specific level for growth in gross domestic product (GDP) while pegging it to be in negative territory for FY21. External member Ravindra Dholakia wrote that along with a distinct possibility of the real GDP growth in India during 2020-21 being in the negative zone for the first time in the last 40 years, even the nominal GDP growth may slip into the negative zone.
Another external member, Chetan Ghate, voted for a 25-basis point (bps) cut in the repo, as against the 40-bps cut that all other members agreed upon, and observed that the MPC “should keep some gunpowder dry” for later.
“The strongest argument for a big rate cut would therefore be the dire growth outcomes because of Covid. However, such rate cuts should be saved for when the economy starts reviving, and not when we are in a lock-down. Rate cuts, assuming that there is transmission and banks lend, works most effectively when the economy is on the upside,” Ghate wrote.