'Front-loaded' repo rate cut meant to spur demand, show MPC meeting minutes

By Ruchi Bhatia

 

India’s rate-setters opted for a larger-than-expected interest rate cut to spur demand, while adjusting the policy stance to retain flexibility amid global uncertainty, minutes of the central bank’s policy meeting showed Friday.

 

The Reserve Bank of India’s rate-setting panel delivered a 50 basis points interest rate cut earlier this month and announced liquidity measures for the banking system. The six-member monetary policy committee also simultaneously shifted its policy stance to neutral from accommodative, indicating limited room for further easing.

 

The moves sparked confusion among market participants, prompting Governor Sanjay Malhotra to clarify earlier this week that additional policy easing may be possible if inflation falls below the central bank’s projections.

 

 

“The front-loaded rate action along with certainty on the liquidity front would send a clear signal to the economic agents, thereby supporting consumption and investment through lower cost of borrowing,” Malhotra said in the minutes. “This package of measures will provide some certainty in the times of uncertainty,” he added.

 

The central bank has lowered the repurchase rate by 100 basis points to 5.50% since February as inflation eased and growth remained under pressure due to global headwinds.

 

Most rate-setters said that the change in stance indicates that further policy action will be data-dependent. Newly-appointed Deputy Governor Poonam Gupta, in her maiden policy statement, said that while a larger repo rate cut could strengthen transmission, any further action should depend on incoming data, as signaled by the shift in policy stance.

 

“The neutral stance provides flexibility and is meant to signal that there is no strong bias for any rate action” unless there is a significant shift in the macroeconomic outlook, said Rajiv Ranjan, an executive director at the central bank.

 

Here’s what other members in the panel said:

 

Nagesh Kumar, external member, said a “double dose” of rate cut is likely to bring down lending rates significantly, helping spur growth

Saugata Bhattacharya, the only MPC member who voted for a quarter-point cut, said a measured and cautious progress in policy easing is more “appropriate” at the current juncture

Ram Singh, another external member, said weak growth and unquantifiable global uncertainties warranted a rate cut and a change in stance

 

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