Growth concerns, easing inflation led to RBI cutting rates
Most MPC members warned prices could start rising due to farm loan waivers, costly vegetables
MUMBAI: Concerns about economic growth and easing inflation prompted five of the six monetary policy committee (MPC) members to call for a cut in the policy rate, but most warned that prices could start accelerating, show the minutes of the panel’s last meeting, released on Wednesday.
The comments reflected a tone of caution and flagged upside risks to inflation from farm loan waivers, rise in food prices, especially vegetables, price revisions withheld ahead of the goods and services tax, implementation of house rent allowance (HRA) under the 7th pay commission and fading of favourable base effect among others.
On August 2, the panel chose to cut the repurchase rate —the rate at which the central bank infuses liquidity in the banking system — by 25 basis points to 6%. One basis point is one-hundredth of a percentage point.
Pami Dua, professor at the Delhi School of Economics, wrote that her analysis showed “a fading economic growth outlook, as well as a pessimistic outlook with respect to exports growth.”
Another external members, Ravindra H Dholakia, professor at the Indian Institute of Ahmedabad, and Chetan Ghate, professor at the Indian Statistical Institute, also expressed concerns about growth. Dholakia called for a 50 basis points rate cut pointing to an “expansion of negative output gap.” The output gap refers to the difference between actual output versus the potential output of the economy.
The sole dissenter to the decision was Michael Patra, executive director, who voted to hold rates because household inflation expectations had gone up . He warned that “the financial environment is bubbly and frothy.”
“The combination of high valuations in equity and fixed income markets, an appreciating currency and the persistence of a liquidity overhang in the money market is a perfect recipe for a financial imbalance. A rate cut can amplify it if RBI is seen as encouraging risk-taking.”
To be sure, the mid-term economic survey released on Friday said that deflationary impulses are weighing on the Indian economy which is likely to fall short of the 7.5% upper band of its forecast growth range this year.
The MPC also decided to keep the policy stance neutral and to watch incoming data keeping in mind that the expected trajectory of inflation which is expected to rise from current lows. Data released on Monday showed consumer prices accelerated 2.36% in July from 1.87% in June as the prices of vegetables increased.
RBI governor Urjit Patel and deputy governor Viral Acharya noted that effective transmission of a policy rate cut should be the focus.