RBI governor says economic activity has shown signs of further weakening
The eighteenth meeting of the Monetary Policy Committee (MPC) was held during 5-7 August 2019 at the Reserve Bank of India, Mumbai. The meeting was attended by all the members - Dr. Chetan Ghate, Professor, Indian Statistical Institute; Dr. Pami Dua, Director, Delhi School of Economics; Dr. Ravindra H. Dholakia, former Professor, Indian Institute of Management, Ahmedabad; Dr. Michael Debabrata Patra, Executive Director; Bibhu Prasad Kanungo,, Deputy Governor in charge of monetary policy - and was chaired by Shaktikanta Das, Governor.The MPC reviewed the surveys conducted by the Reserve Bank to gauge consumer confidence, households' inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters. The MPC also reviewed in detail staff's macroeconomic projections, and alternative scenarios around various risks to the outlook. Drawing on the above and after extensive discussions on the stance of monetary policy, the MPC adopted the resolution that is set out below.
On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75% to 5.40% with immediate effect. The MPC also decided to maintain the accommodative stance of monetary policy.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy. Four members (Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das) voted to reduce the policy repo rate by 35 basis points, while two members (Dr. Chetan Ghate and Dr. Pami Dua) voted to reduce the policy repo rate by 25 basis points.
As per the minutes of the MPC's meeting following statements were given by the members
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Statement by Dr. Chetan Ghate
On the external front, growth in the global economy remains tepid. Trade tensions have worsened leading to some loss in our net export growth. Domestically, a variety of growth indicators have weakened further. Going forward, policy coordination between monetary and fiscal policy will be crucial for a healthier and more durable growth-inflation mix in the economy. While the real economy needs some support, we should wait for more transmission to happen and vote to reduce the policy rate by 25 bps and to retain the stance as accommodative.
Statement by Dr. Pami Dua
Given that the headline inflation is projected to remain below target in 2019-20, I vote for a pre-emptive rate cut of 25 basis points to enhance consumer confidence and improve investor sentiment. On a cumulative basis, this denotes a policy rate cut of 100 basis points since February 2019, which is sufficient at this point in time. I also vote to keep the stance as accommodative.
Statement by Dr. Ravindra H. Dholakia
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. As far as the general practice of taking 25 bps as a unit for cutting or raising the policy rate is concerned, there is no logic or scientific basis for it, particularly when we measure inflation rate, GDP growth rate, fiscal deficit percentage, etc. in single decimal. Ideally, there is a case for considering the unit to be 10 bps for cutting or raising the policy rate. I would, therefore, like to cut the policy rate by 40 bps, but I do not mind going with majority opinion of cutting the rate by 35 bps this time, and maintaining the accommodative stance.
Statement by Dr. Michael Debabrata Patra
In India, negative gaps have opened up in respect of both output and inflation, warranting an appropriate policy response. The issue is: how is the policy headroom to be used? Monetary policy has 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. A more broad-sided response involving all levers of policy acquires the highest priority now. The overarching goal is to reinvigorate domestic demand and the time to do it is now. On these considerations, I vote for a 35 basis points reduction in the policy rate while persevering with the accommodative stance of monetary policy.
Statement by Bibhu Prasad Kanungo
Given the benign inflation outlook that is expected to continue for the rest of the year and up to Q1:2020-21, I am of the view that there is a need for monetary policy action to support economic activity and close the output gap. I, therefore, vote for a reduction in the policy repo rate by 35 bps and also keep the stance of monetary policy as accommodative.
Statement by Shaktikanta Das
Economic activity has shown signs of further weakening since the last MPC meeting in June 2019. Several high frequency indicators have either slowed down or contracted in recent months. Headline CPI inflation has evolved broadly along the projected lines; CPI inflation excluding food and fuel continued to soften, while food inflation has edged up.
Global economic activity has been losing pace, weighed down by intensifying trade tensions and geo-political uncertainty. GDP numbers for Q2:2019 in respect of some major advanced and emerging market economies have been subdued. Central banks in both advanced and emerging market economies have been increasingly resorting to more accommodative stances of monetary policy.
Several high frequency indicators for May-June also suggest weakening of services sector activity.
Import of capital goods contracted in June, suggesting weakening of investment activity. The services PMI moved into expansion zone in July on increase in new business activity, new export orders and employment.
The impact of monetary policy easing since February 2019 and favourable base effects are expected to support GDP growth, especially in the second half of the year.
Liquidity in the system has been in surplus since June 2019 with the surplus absorbed under the reverse repo window of the Reserve Bank being almost Rs 2.0 lakh crore on August 6, 2019. The past policy rate cuts have been fully transmitted to financial markets. The transmission to bank lending rates has been inadequate, though it is expected to improve in the coming weeks and months.
Credit growth has slowed down somewhat in the recent period; credit to micro, small and medium enterprises, in particular, remains anaemic.
Overall, there is clear evidence of domestic demand slowing down further.
Investment activity has been losing traction. The weakening of the global economy in the face of intensifying trade and geo-political tensions has severely impacted India's exports, which may further impact investment activity, going forward.
Private consumption, which has been the mainstay of domestic demand, has also decelerated. The slowing down of domestic demand is also reflected in significant moderation in CPI inflation excluding food and fuel; and contraction in merchandise imports.
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 past three rate cuts is gradually working its way to the real economy.
With headline inflation projected to remain within the target over the next one-year horizon, supporting domestic growth by further reducing interest rates needs to be given the utmost priority.
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. I am, therefore, of the view that a reduction in the policy repo rate by conventional 25 bps will be inadequate. On the other hand, a 50 bps rate cut might be excessive and indicate a knee jerk reaction. A policy rate adjustment of 25 bps or multiples thereof may not always be consistent with the evolving macroeconomic situation.
Hence, at times it is apposite to calibrate the size of the conventional rate adjustment. Considering these aspects, I vote for reducing the policy repo rate by 35 basis points and for continuing with the accommodative stance of monetary policy.
The calibration of the size of the rate cut is expected to reinforce and quicken the impact of (i) the past cumulative rate reduction of 75 basis points; (ii) change in the stance from neutral to accommodative; and (iii) injection of large surplus liquidity in the system.
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