Flagging economy required rate cut boost: MPC minutes

Mumbai: Growth impulses in the economy have clearly weakened and this calls for decisive monetary policy measures to promote economic growth, said RBI Governor Shaktikanta Das while voting for a 25 basis points (bps) rate cut along with other five members at the Monetary Policy Committee meet earlier this month.

Das said the headline Consumer Price Index Inflation (CPI) has evolved broadly along the projected lines. “Keeping in view the evolving growth-inflation dynamics, there is a need for decisive monetary policy action. Hence, my vote is to reduce the policy repo rate by 25 basis points,” Das said, according to the minutes of the June Monetary Policy Committee meeting, released on Thursday.

Das advocated that a rate cut should be accompanied with a shift in stance of monetary policy from neutral to accommodative to send a “clear signal” as growth impulses have clearly weakened, while the headline inflation trajectory is projected to remain below 4 per cent throughout 2019-20 even after considering the expected transmission of the past two policy rate cuts.

“Since the last MPC meeting in April 2019, greater clarity has emerged about the evolving macroeconomic situation. Overall, there is clear evidence of economic activity losing traction, with the GDP growth in Q4:2018-19 slowing down to 5.8 per cent. CPI inflation excluding food and fuel registered a 20-month low in April 2019 even as the headline CPI inflation evolved broadly along the projected lines. High frequency indicators suggest that the global economy could not sustain the improved performance in Q1:2019 in the face of a sharp slowdown in trade and manufacturing. Consequently, central banks in both advanced and emerging market economies have adopted an accommodative stance in monetary policy,” said Das.

The six member MPC noted that there was a scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate. All the members unanimously decided to reduce the policy repo rate by 25 basis points and change the stance of monetary policy from neutral to accommodative. The repo rate nstands at 5.75 per cent. This was the third straight cut since the start of 2019 after data showed the economy growing at its slowest in five years.

MPC member and RBI Deputy Governor Viral Acharya voted for a rate cut ‘hesitantly,’ stating that the mixed picture on economic growth has morphed into one where at least some aspects have weakened considerably over the past two quarters. He also flagged some upside risks, including deficiency in monsoon and volatility in crude oil prices, to
inflation.