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RBI governor cites weak investment demand as reason for 25bps rate cut

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Published: April 19, 2019 2:04:29 AM

Reserve Bank of India (RBI) governor Shaktikanta Das cited weak investment demand and a lower-than-expected inflation trajectory to justify his vote in favour of a 25 basis point (bps) reduction in the repo rate to 6% at the April meeting of the monetary policy committee (MPC).

With the inflation outlook looking benign and headline inflation expected to remain below target in the current year, it becomes necessary to address the challenges to sustained growth of the Indian economy. Hence, I vote for reducing the policy repo rate by 25 bps. — Shaktikanta Das, RBI governorWith the inflation outlook looking benign and headline inflation expected to remain below target in the current year, it becomes necessary to address the challenges to sustained growth of the Indian economy. Hence, I vote for reducing the policy repo rate by 25 bps. — Shaktikanta Das, RBI governor

Reserve Bank of India (RBI) governor Shaktikanta Das cited weak investment demand and a lower-than-expected inflation trajectory to justify his vote in favour of a 25 basis point (bps) reduction in the repo rate to 6% at the April meeting of the monetary policy committee (MPC).

In his statement published as part of the minutes of the meeting, Das said, “Investment demand is losing traction and a deceleration in exports may further impact investment activity. With the inflation outlook looking benign and headline inflation expected to remain below target in the current year, it becomes necessary to address the challenges to sustained growth of the Indian economy. Hence, I vote for reducing the policy repo rate by 25 basis points.”

Voting against a rate cut, deputy governor Viral Acharya observed that counter-factual exercises suggest that 6.25% policy repo rate is just “right” for achieving the headline inflation target of 4% on a durable basis in the medium term. He said that continuing oil price rise or fiscal impulses or seasonal uptick involatile vegetable prices would likely require some tightening down the road. “…only a substantial collapse in global growth, which seems unlikely at present given proactive responses of central banks in advanced economies and China, would justify a rate cut at this point,” Acharya said in his statement.

Executive director Michael Patra, seen widely as the most hawkish member of the MPC, voted for a 25 bps rate cut while maintaining a neutral policy stance. He, too, pointed to subdued inflation and risks to growth. “I will, however, remain watchful about the upturn in food prices that usually precedes the onset of the monsoon,” Patra added.

Ravindra Dholakia voted in favour of a rate cut and also asked for the policy stance to be changed to ‘accommodative’ from ‘neutral’. He argued that the downward revision of real growth for FY20 to 7.2% from 7.4% by the RBI opens up the output gap, reflects the unemployment gap substantially and needs a policy response. “Cutting the policy rate gradually over time would correct the real interest rate in the economy and encourage investments,” Dholakia noted, adding, “In this context, it is also relevant to note that most of the central banks globally have changed their tone to dovish.”

MPC member Pami Dua voted in favour of the rate reduction while keeping the stance unchanged “in view of the global growth slowdown and a benign global and domestic inflation outlook”.

Member Chetan Ghate voted against the rate cut as maintaining status quo on rates at the current juncture would be consistent with sustainable growth in the economy and achieving the inflation target over the medium term. “Contrary to some of my colleagues in the MPC, I feel that frequent changes in policy rates and stance runs the risk of introducing uncertainty and volatility because of our own actions,” Ghate said.

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