Inflation no more a bother for RBI, stagnant price rise worries it more
RBI Governor Das said the moderation of CPI is reflecting a slowdown of domestic demand.
At the August 5-7 rate-setting meeting, members of RBI’s monetary policy committee (MPC) suggested that the significant moderation in retail inflation was actually reflecting softening of demand in the economy.
RBI Governor Shaktikanta Das said the moderation of CPI inflation excluding food, fuel and contraction in merchandise imports is actually reflecting a slowdown of domestic demand, the minutes of the last MPC meet released on Wednesday showed.
This raises hopes that RBI may cut interest rates more rapidly going forward, trying to create demand in the economy.
“With the headline inflation projected to remain within target over the next one year, there is scope for reducing interest rates further going forward,” Das said.
In his statement, Das said economic activity has shown signs of further weakening since the last policy review in June 2019 and credit growth has slowed down somewhat in recent times. The economy needs a larger push. “Credit to micro, small and medium enterprises, in particular, remains anaemic,” he said.
Das also told the MPC that the transmission of rate cuts is expected to improve in the coming weeks and months. He said there is a need to bolster dwindling domestic demand and support investment activity, even as the impact of past three rate cuts is gradually working its way into the real economy.
RBI cut the repo rate by 35 basis points on August 7 – the fourth successive rate reduction – bringing it down to a nine-year low in an attempt to boost an economy which has been growing at its slowest pace in five years.
In its policy statement, the central bank reduced its growth projection for the economy to 6.9 per cent for this financial year from 7 per cent forecast in June due to a slowdown in demand and investments.
MPC member Michael Debabrata Patra said the macroeconomic outlook appears to have darkened, which is what is getting reflected in the inflation outcomes.
Ravindra H Dholakia, another member, suggested that positive sentiments and a business-conducive environment need to be enhanced to boost investment activities. “It requires carrying out several economic reforms in land and labour markets, electricity tariffs and other resources, and taxation of income and goods and services, besides urgently correcting prevailing high real interest rates,” he said.
Dholakia also believes fiscal slippage is not a matter of serious concern for FY20, because the Union Budget has maintained the target given in the fiscal consolidation path and state budgets put together are also not likely to show any serious divergence from that path.