Govt measures, monetary easing to boost economy: RBI minutes
RBI slashed the policy repo rate by 25 basis points in the latest review.
According to the minutes of the Monetary Policy Committee’s policy review held on October 1-4, released on Friday, Das told the panel that private investment has lost traction due to the corporate sector's reluctance to make fresh investment even though capacity utilisation in the manufacturing sector has operated close to the long-term average in recent times.
He said the government has initiated several measures in recent months which, together with monetary easing by RBI, are expected to work their way through the real economy.
“The unsettled global environment in the face of rising trade tensions has impacted India’s exports, besides delaying the revival of private investment by creating uncertainty. In this environment, it is important to focus on strengthening domestic demand,” the governor said as he pushed for a 25 basis points rate cut.
RBI slashed the policy repo rate by 25 basis points in the latest review, cumulatively lowering it by 135 basis points in eight months. One MPC member Ravindra H Dholakia voted for 40 basis point rate cut, while other five including Das, Chetan Ghate, Pami Dua, Michael Debabrata Patra and Bibhu Prasad Kanungo voted for a 25 basis point rate cut.
“I also vote for persevering with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target. This enhanced forward guidance on the stance of monetary policy should strengthen monetary transmission and support the real economy,” Das said.
He said systemic liquidity has been in surplus since June 2019 and the introduction of lending rates linked to an external benchmark should result in better monetary transmission.
Making his case for a 40 basis points rate cut, Dholakia said external benchmarking of the lending rates by the banks would result in better transmission now. Corporate bond market reforms by allowing entry to corporates with lower rating than AAA, encouraging issuance of long term bonds and creating a proper yield curve for the government bond market to serve as a benchmark can go a long way to deepen the market and improve the transmission.
“While such reforms are urgently required, they should not constrain the rate action by RBI. Enough space exists for a 40 bps reduction in the policy repo rate now with space still existing for future till growth recovers. Hence, I vote for continuing with accommodative stance and cut the policy repo rate by 40 bps now,” he said.
He also highlighted that high frequency data on indicators for estimating quarterly growth suggest that growth slowdown may continue in the second quarter of 2019-20. Any substantial recovery is likely only in the Q3 of 2019-20. This is because, the impact of corporate tax cut particularly for the new enterprises and good monsoon will be kicking off from the third quarter of the current year.
“As a result, the output gap would continue to be negative for at least next 3 to 4 quarters leading to downward pressures on the CPI excluding food and fuel,” said Dholakia.
Key highlights from other MPC members:
1) Since the last review, economic activity has continued to weaken.
2) External demand conditions have worsened. Geopolitical risks remain unresolved. There has been a resurgence of trade policy tensions, and global growth has continued to weaken. Exports contracted in Q1 FY19:20.
3) Domestically, sentiment remains weak.
4) Consumer confidence fell for the 3rd consecutive round.
5) The Business Expectation Index (BEI) also dipped. However, sales growth remained steady for the non-IT services sector. Weak sentiments may become self-fulfilling, which will complicate the job of monetary policy.
1) Private consumption and investment activity are weak, and business and consumer sentiment are somewhat downbeat.
2) Given the slowdown in growth on the domestic and global fronts, along with benign headline inflation and the expectation that it will remain below target, there is policy space to further cut the policy repo rate to boost domestic growth, within the flexible inflation targeting mandate.
Michael Debabrata Patra
1) Inflation continues to trail below target and is projected to remain so over the 12 months ahead horizon.
2) The outlook is fraught with downside risks, but the prospects for agriculture have brightened and along with industry’s inventory restocking requirements in the festival season, scope opens up for reviving spending.
Bibhu Prasad Kanungo
1) The slowdown of GDP growth in the recent period has been underpinned by deficient domestic demand. The recent measures initiated by the government should be helpful in supporting domestic demand, especially investment.
2) While the impact of past policy rate cuts by the MPC is expected to transmit to the real sector gradually, there is a need to reinforce the past monetary policy measures and the recent steps taken by the government in supporting domestic demand. As inflation is projected to remain below the target of 4 per cent till the first quarter of 2020-21, policy space is available to support growth.