“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,” Reserve Bank of India (RBI) Governor Shaktikanta Das said at the meeting of the Monetary Policy Committee (MPC). “The weakening of private consumption, which for long has been the bedrock of aggregate demand, in particular, is a matter of concern,” minutes of the MPC meeting published Friday cited Das as saying.
All six MPC members voted to retain the accommodative stance at the October meeting, with Ravindra Dholakia categorically favouring further cuts until economic activity were to rebound. Dholakia had voted for a 40 bps repo rate cut in the 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 in the future until growth recovers,” Dholakia said.
Weak private consumption and investment activity, besides downbeat business and consumer sentiment, remained a worry for Pami Dua, who said that a weak global scenario could not provide the necessary impetus to drive domestic growth.
“This pronounced cyclical downswing suggests that the state of the economy will likely get worse before it gets better,” the central bank’s MD Patra said.
RBI lowered its policy rate by 25 bps early October, raising the cumulative rate reduction to 135 bps since February.
Further rate action will, however, largely depend on price movements.
“As inflation is projected to remain below the target of 4% until the first quarter of 2020-21, the 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 Mint Road 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 results.
The minutes of the October meeting noted that the fall in the weighted average lending rate on fresh rupee loans 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, an external member of the policy-making committee. “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.”