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RBI hints more rate cuts likely to get economy on track

All six MPC members voted to retain the accommodative stance at the October meeting.

, ET Bureau|
Oct 18, 2019, 09.39 PM IST
Kolkata: Sluggish economic activity and slowdown in consumption may create space for more repo rate cuts by Reserve Bank of India (BI) going forward, while specter of more pains before economy revives to path of higher growth remained key concern for monetary policy makers, according to minutes of the Monetary Policy Committee (MPC) meeting held in October.

"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," RBI Governor Shaktikanta Das said.

"The weakening of private consumption, which for long has been the bedrock of aggregate demand, in particular, is a matter of concern,” Das said.

All six MPC members voted to retain the accommodative stance at the October meeting with Ravindra Dholakia categorically stating in favour of further rate cuts until the economic activity rebounds to be firmly on path of higher growth. Dholakia had voted for 40 bps repo rate cut in last policy while others were in favour of 25 bps.

"In my opinion, enough space exists for a 40 bps reduction in the policy repo rate now with space still existing for future till growth recovers," Dholakia said.

The weak private consumption and investment activity along with downbeat business and consumer sentiment remained a worry for Pami Dua, who said that weak global scenario would not likely to provide impetus to domestic growth.

“This pronounced cyclical downswing suggests that the state of the economy will likely get worse before it gets better,” RBI’s M.D. Patra Said.

RBI lowered policy rate by 25 bps in the October policy, making it 135 bps cut cumulatively since February. One basis point is equal to one-hundredth of a percentage point.

Further rate action will however largely depend on price movements.

"As inflation is projected to remain below the target of 4% till the first quarter of 2020-21, policy space is available to support growth," said deputy governor BP Kanungo. "I, therefore, vote for reducing the policy repo rate by 25 bps and continue with an accommodative monetary policy stance until the economy is on a revival path, within the mandate of flexible inflation targeting."

The consumer price index (CPI), which RBI tracks for inflation targeting, rose to a 14-month high of 3.99% in September from 3.28% in August.

RBI has set medium-term target for CPI of 4% within a band of 2% on either side.

What made committee members equally concerned was the lack of monetary transmission despite surplus liquidity in the inter-bank system while they expect that the linking of lending rate to external benchmark such as repo rate would start yielding better result.

The minutes of October meeting observed that the fall in the weighted average lending rate on fresh rupee remained static at 29 bps as in the August review. The rate on outstanding rupee loans has however increased by 7 bps.

"The RBI should be commended for implementing a new set of norms on external benchmarking," said Chetan Ghate. "This will help with monetary transmission. As Milton Friedman said, monetary policy works with long and variable lags. In the Indian case, these lags are made worse by frictions in the banking system, complicating the MPC’s efforts to implement counter-cyclical policy."
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