RBI monetary policy panel's worries about growth signals more rate cuts

MPC concern explains Governor Shaktikanta Das's statement that the Reserve Bank of India would keep its policy stance accommodative.

The Reserve Bank's Monetary Policy Committee (MPC) was unanimous in its view that a deepening economic slowdown is worrying enough to keep interest rates low for longer, the minutes of its latest meeting show.

The concern explains Governor Shaktikanta Das’s statement that the Reserve Bank of India would keep its policy stance accommodative for as long as it is necessary to revive growth. On October 4, the MPC lowered interest rates for a fifth straight time after data showed economic expansion slowed to a six-year low of 5 per cent in the quarter ended June.

Minutes from the policy meeting released on Friday showed Bibhu Prasad Kanungo, the deputy governor overseeing RBI’s monetary policy department, pushed for a rate cut to revive domestic demand, citing the room provided by inflation that’s within target. His colleague, Michael Patra, said while monetary policy was taking the lead in trying to revive the economy, “a full throttle effort by all arms of macroeconomic management is the need of the hour.”

Key insights

Das underlined the importance of strengthening domestic demand. “The weakening of private consumption, which for long has been the bedrock of aggregate demand, in particular, is a matter of concern,” he said, adding that private investment has also lost traction, with the corporate sector reluctant to make new investments.

Patra said the economic outlook was fraught with downside risks. “In its counter-cyclical role, monetary policy has to be preemptive in addressing the negative gaps –- inflation below target, and output below potential –- that seem to be developing some persistence,” he said.

Chetan Ghate, an external member of the MPC, said since the last review economic activity has continued to weaken. He added that further policy action would depend on evolving growth-inflation dynamics.

Ravindra Dholakia, a dove in the panel, said concerns about likely fiscal slippage are misplaced. He cited his own calculations that showed overall impact of all current announcements on the combined fiscal deficit to be limited to 10 to 20 basis points. “It should not have any serious adverse impact on the inflation,” he said.

All six members voted for a cut, although one voted for a deeper 40 basis point cut

Growth in the consumption-driven economy has taken a beating amid rising unemployment and ongoing stress in the banking system, contributing to a collapse in consumption demand. The RBI lowered India’s full-year growth forecast to 6.1% -- which would be a seven-year low -- and the International Monetary Fund this week echoed that projection.

The RBI has cut rates by a cumulative 135 basis points this year, the most by any Asian central bank. The easing, along with fiscal measures announced by the government, are expected to spur growth although there are no signs of a reversal so far.