RBI MPC meeting minutes show further rate cut on the anvil

New Delhi: Some of the major keywords that came out of the Monetary Policy Committee (MPC) meeting of the Reserve Bank of India (RBI) on Wednesday were: benign inflation, tepid credit growth and slowdown in demand. RBI Governor Shaktikanta Das said that the weakening of domestic growth impulses and unsettled global macroeconomic environment called for bolstering dwindling domestic demand and supporting investment activity.

Headline inflation to remain within target

Das said that headline inflation is projected to remain within the target over the next one-year horizon, and that supporting domestic growth by further reducing interest rates needs to be given the utmost priority in order to give the economy needs a larger push.

"Global economic activity has been losing pace, weighed down by intensifying trade tensions and geo-political uncertainty. GDP numbers for Q2:2019 in respect of some major advanced and emerging market economies have been subdued. Central banks in both advanced and emerging market economies have been increasingly resorting to more accommodative stances of monetary policy," Das said.

Dr Chetan Ghate, Professor in the Economics and Planning Unit of Indian Statistical Institute, also highlighted the tepid growth in the global economy, and said that the variety of growth indicators have weakened further domestically.

MPC member Pami Dua also accounted for 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 enhance consumer confidence and improve investor sentiment.

Das says 25 bps rate cut will be inadequate

Das concluded by saying, "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. A policy rate adjustment of 25 bps or multiples thereof may not always be consistent with the evolving macroeconomic situation. Hence, at times it is apposite to calibrate the size of the conventional rate adjustment. Considering these aspects, I vote for reducing the policy repo rate by 35 basis points and for continuing with the accommodative stance of monetary policy.
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The calibration of the size of the rate cut is expected to reinforce and quicken the impact of (i) the past cumulative rate reduction of 75 basis points; (ii) change in the stance from neutral to accommodative; and (iii) injection of large surplus liquidity in the system."

The backdrop

The RBI had on August 7 reduced the benchmark lending rate by 35 basis points to 5.40 percent amid concerns over slowdown in the economy. Before this, the Central bank had slashed the rate thrice by 25 basis points each time.

Two of Das's RBI colleagues and an independent member in the rate-setting MPC had also favoured a 35-basis point reduction, against the normal practice of 25 or 50 basis points change, in the third bi-monthly monetary policy of 2019-20.

The other two members, both independent, in the six-member MPC had voted for a 25-basis point cut.