Minutes of MPC meeting: Fixing weak economic growth remains top priority

All three internal members in the monetary policy committee (MPC), including Governor of the Reserve Bank of India (RBI) Shaktikanta Das, voted unanimously for a cut of 35 basis points, to support economic growth. 

Minutes of the meeting released on the central bank website showed Das viewed a 50 basis points cut indicating a “knee-jerk reaction” and being excessive, while 25 basis points to be inadequate. 

“Given the current and evolving inflation and growth scenario at this juncture, it can no longer be a business-as-usual approach. The economy needs a larger push,” Das said. 

Newly inducted MPC member, Deputy Governor B P Kanungo, in place of Viral Acharya, found merit in the governor’s argument and voted for a 35 basis points cut. 
 

External members Chetan Ghate and Pami Dua voted for a 25 basis points cut. 

Finally, the central bank cut policy repo rate by 35 basis points to 5.40 per cent on August 7. 

All the members took comfort in a benign inflation, which is expected to remain low in the next one year. Growth, falling below 7 per cent, worried everyone. 

“In view of weakening of domestic growth impulses and unsettled global macroeconomic environment, there is a need to bolster dwindling domestic demand and support investment activity, even as the impact of the past three rate cuts is gradually working its way to the real economy,” Das was quoted in the minutes. 

Dholakia said there was “no logic or scientific basis” for 25 basis points cut when the economic growth, inflation, fiscal deficit percentages etc. are measured in single digits. He favored a cut of 40 bps, but went with the majority view of 35 bps. 

“Given that there is a significant policy space to correct the real rate of interest and thereby helping the economic activities to recover, it is prudent in my opinion to cut the policy rate somewhat aggressively but cautiously, keeping some space for future exigencies,” Dholakia said. 

Chetan Ghate noted that the MPC had enacted both “insurance cuts”, to address current and future downside risks to growth and “data-dependent” cuts, reflecting the evolving growth-inflation risk picture, in the February-June window. 

“The question then is: what incremental information since the last review warrants a need for further accommodation?” 

He reasoned that on the external front, growth in the global economy remains tepid, while trade tensions worsened, leading to some loss in India’s net export growth. 
 

Domestically, a variety of growth indicators weakened further. 

What is telling is that large swings in the Indian business cycle are still not a thing of the past, despite the adoption of inflation targeting in India. 

The large public sector borrowings, about 8-9 per cent of the gross domestic product (GDP), will lead to detrimental outcomes for the economy, according to Ghate. 

“While a fiscal glide path should be seen as a limit, once in place, it becomes a target,” Ghate said, adding, in such cases, “convergence to the limit happens, and a form of creative accounting kicks in.” 

According to Pami Dua, while monetary policy can impact cyclical factors, it has its limitations with respect to significantly impacting structural factors. 

“Therefore, investment-focused fiscal policy and active continuation of structural reforms are imperative at this juncture to complement the already substantial easing that has been delivered since February 2019.” 

The RBI’s Executive Director Michael Patra said monetary policy had been proactive and front-loaded as the first line of defence. 

“From here on, the space for monetary policy action has to be calibrated to the evolving situation, especially as the nature and depth of the slowdown is still unravelling and elbow room may be needed if it deepens,” Patra said.