Why RBI’s 25bps repo rate cut was a missed opportunity

Published: October 11, 2019 1:52:02 PM

It is rarely the case that all national macroeconomic events align as well as they had done in the first week of October 2019.

Even from the global macro environment perspective, the key global exposure for the country, Brent, has settled back into range after the shock of the attack on the Aramco facilities in Saudi Arabia.

By Dr Ranjan Chakravarty

It is rarely the case that all national macroeconomic events align as well as they had done in the first week of October 2019. The Finance Ministry, with intrepid corporate tax cuts, had accomplished the most stupendous demand side policy move of all to get the economy back onto the growth track that had recently evaded it. On the Supply side, with the RBI’s outstanding shepherding of inflation and expert management of the monetary aggregates, inflation is clearly under control. At the same time, the deficit is well within range. These three elements alone qualify for the ratings agencies to consider putting the country on watch for an upgrade, not as grounds for growth pessimism at all.

Even from the global macro environment perspective, the key global exposure for the country, Brent, has settled back into range after the shock of the attack on the Aramco facilities in Saudi Arabia. To the credit of the Saudi authorities, they did an outstanding job of returning production to normal as rapidly as they did, and in so doing, reassured the world community on the continuity of supply, allaying any fears of massive price dislocations that such events generally bring in their wake. The impact on the Rupee has been benign, and it continues to stay in its expected range.

Domestically, the monsoon has finally delivered in spite of the initial hiccups this year. It is a fact that we are still vulnerable to the climate in spite of our progress on myriad fronts. A good monsoon takes the pressure off prices and inventory costs. Hence cost push inflation is naturally contained. The flip side of the auto demand slowdown was that demand pull inflation is not a spectre that policy makers have to contend with at the moment.

With the monetary economy and the real economy coming into the most desirable alignment, here was the opportunity for the big growth push from the Monetary Policy Committee. All that were required, by our estimate, was a cut of between 35 and 50 basis points. The opportunity was historic. All we needed was 10 basis points more than the 25 that were delivered.

In monetary policy, each basis point is a treasure. Deploying it is all a question of timing. If a cut of 25 is not enough, then it is 25 basis points lost from the armoury. Now, the next rate cut has to overcompensate it with a different global alignment which we cannot predict at this point in time. Though we are certain that the fundamental strength in the economy will not evaporate in a quarter and we strongly feel that all is still right, there was no reason to acquiesce to a lower growth trajectory at all.

Consequently, we urge the Monetary Policy Committee to align itself much more strongly, going forward, to the clear growth orientation of Governor Das. Inflation is a monetary phenomenon, and once it has come under control, the role of monetary policy is clearly to enable the bridging of the real-potential output gap. Reverting to accommodative monetary aggregate management, as exemplified by this rate cut, falls short of accomplishing this task. Growth is the priority, the FM and the Governor are aligned, and all that is required is a united and strong push. If current conditions persist, we hope that it will be delivered completely and substantially in the next round.

(The author is Product Strategist at Metropolitan Stock Exchange. The views expressed are the author’s own)

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