• Sunday, 26 May 2019

Weak growth spurred RBI to cut rate; MPC considered bigger cut


Feb 22, 2019 (3 months ago) |
Mumbai, Feb 21 : Weak growth impulses along with expectations of lower food and fuel prices led the Reserve Bank of India to cut its key lending rate earlier this month and change its monetary policy stance to "neutral," showed the minutes of the latest Monetary Policy Committee (MPC) meeting released here on Thursday.
The MPC even considered a higher interest rate cut, the minutes said.

At its final bi-monthly policy review of the present fiscal on February 7, the MPC, presided over for the first time by the new RBI Governor Shaktikanta Das, voted to lower its repo rate, or short-term lending rate for commercial banks, by 25 basis points (bps) to 6.25 per cent.

"Growth impulses have weakened and there is a need to spur private investment and strengthen private consumption, especially in the wake of slowing global growth," Das was quoted as saying in the minutes.

"Inflation readings since the December 2018 policy have shown a sharp decline. Hence, space has opened up for policy action to address the growth concerns in pursuance of the provisions of the RBI Act, as amended in 2016," Das said.

The RBI also changed the policy stance from "calibrated tightening" to "neutral."

Das noted that the neutral stance will provide flexibility and "room to address challenges to sustained growth of the Indian economy over the coming months, as long as the inflation outlook remains benign."

While the MPC delivered a surprise repo rate cut in a 4-2 split vote, members unanimously agreed to the change in policy stance.

The RBI's decision was guided by its "assessment of the evolving macroeconomic situation" wherein headline inflation was projected to soften further while the economy's growth impulses had moderated.

Ravindra Dholakia, the government nominee in the six-member MPC, said there was space for about 60 bps repo rate cut, as the RBI's headline inlation forecast for the year ahead turned out to be less than the target of 4 per cent for the first time.

"I think space has opened up for a substantial rate cut of about 50 to 60 bps going forward," he said.

RBI Deputy Governor Viral Acharya, who along with independent member Chetan Ghate voted for status quo, suggested that the MPC should wait till the next policy in April for a rate cut.

Acharya, however, voted for a change in RBI's stance from "calibrated tightening" to "neutral" to retain policy flexibility at future dates based on incoming data.

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Weak growth spurred RBI to cut rate; MPC considered bigger cut

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