At his first monetary policy since taking over as the RBI governor, Shaktikanta Das favoured a rate cut citing weakened growth impulses and broadly balanced risks around the baseline to inflation.
Reserve Bank of India (RBI) deputy governor Viral Acharya, who voted against a rate cut at the last monetary policy committee (MPC) meeting, indicated the decision to cut would be dependent on the assumption of sustained weak momentum of food prices all through the next 12 months, which should be viewed alongside the significant upside risk from fiscal measures needed to address agrarian distress.
The RBI had cut the repo rate — at which it lends to banks — to 6.25% at the MPC review held on February 5-7.
The minutes quoted Acharya as saying, “The assumption of sustained low momentum in food prices leads to a consideration of the risk of agrarian distress. Such distress will necessitate a political-economy response in the form of fiscal support to the agrarian economy in the short run; effects of such fiscal support may play out partly over the next 12 months and partly beyond.”
At his first monetary policy since taking over as the RBI governor, Shaktikanta Das favoured a rate cut citing weakened growth impulses and broadly balanced risks around the baseline to inflation. Of the six members of the MPC, four had voted to reduce the key benchmark rate by 25 basis points, said the minutes of the MPC meeting released by the Reserve Bank on Thursday. However, all members were in favour of changing the stance from ‘calibrated tightening’ to ‘neutral’.
“Growth impulses have weakened and there is a need to spur private investment and strengthen private consumption, especially in the wake of slowing global growth. Inflation readings since the December 2018 policy have shown a sharp decline. The overall food outlook remains benign and the headline inflation one-year ahead is projected to remain below the target level of 4%. Risks to inflation at this stage are also broadly balanced around the baseline. Hence, space has opened up for policy action to address the growth concerns in pursuance of the provisions of the RBI Act as amended in 2016. The favourable macroeconomic configuration that is evolving underscores the need to act decisively,” said the minutes of the meeting quoting Das.
The governor did, however, note that beyond the near-term, there is a need to guard against some uncertainties surrounding the inflation outlook, the recent unusual spike in the prices of health and education, and impact of several Budget proposals on the aggregate demand.
Acharya was also of the view that the current healthy levels of growth allowed one to wait till the next policy by when uncertainties around one-off surprises in health and education inflation, oil prices, and global recessionary risks, could resolve.
Another member Chetan Ghate, professor, Indian Statistical Institute, was in favour of status quo based on the view that inflation may have softened but not in a broad-based way.
Michael Debabrata Patra, executive director of RBI, voted in favour of a policy repo rate cut. “My sense from recent readings is that inflation is troughing and its path over the 12- months ahead horizon is likely to be one that rises from current lows,” Patra said during the three-day MPC policy review.
Former Indian Institute of Management professor Ravindra H Dholakia said, rate cut was “ appropriate” to “provide impetus to growth without materially risking inflation beyond the targeted 4% .”
The sole female member in the six-member panel – Delhi School of Economics director Pami Dua – also voted for a cut in light of the benign inflation outlook and a moderation in inflation expectations, as well as the likely headwinds due to the global growth slowdown.