Eye on inflation, but space for more rate cuts, says Das
MUMBAI: While the sharper-thanexpected economic downturn in India may have shocked many, the Reserve Bank of India (RBI) started cutting interest rates well in advance in February last year as it had noticed signals of slowing growth momentum, governor Shaktikanta Das said on Monday.
Delivering the keynote address at the 13th Mint Annual Banking Conclave in Mumbai, Das said that RBI’s monetary policy committee recognises that there is space for further rate cuts even as it keeps an eye on inflation.
Das said that 2019 was a very unusual year as no one thought that growth could slow to 5% at the beginning of the year. The first advance estimates of India’s gross domestic product for the year to March 31 has pegged economic growth at 5%, the slowest in 11 years.
“It was a complete surprise for everyone. Having said so, I would like to say that perhaps the RBI was among the early ones that noticed that the growth momentum was slowing down,” said Das. The RBI has cut its key policy rate by 135 basis points (bps) between February and October last year.
Das reiterated the monetary policy committee’s (MPC) intent in terms of the accommodative stance. “This time also, the MPC, while recognising that inflation has spiked and we need to wait for more data to see that moderation in inflation is well entrenched... the MPC does recognise very clearly that there is space for rate cuts,” he said.
RBI is faced with the dual challenge of rising inflation and a slowing economy and as three members of the MPC highlighted in the last meeting, structural reforms are now inescapable. Meanwhile, India’s retail inflation accelerated to 7.59% in January, beyond RBI’s targeted range. In February, the rate-setting committee had to revise its inflation expectations as measured by the consumer price index (CPI) upwards to 6.5% for the fourth quarter of FY20, higher than its mandated corridor of 2-6%.
Speaking on the current monetary policy framework, Das said that it provides due focus on growth. That apart, financial stability, he said, has always been the underlying theme.
“In the minutes of the current monetary policy, I have mentioned that a higher growth trajectory will also bring in financial stability which is required. The present framework gives due focus on growth and it is a question of how you apply it,” he added.
BANKS MUST PREPARE FOR VIRUS CHALLENGES
Meanwhile, Das on Monday said banks must be prepared to face the challenges in the wake of the coronavirus outbreak, as slowing global growth will add to the stress of the Indian corporate balance sheet.
The governor quoted agencies, such as the International Monetary Fund, to highlight the fact that global growth was expected to slowdown further because of the coronavirus contagion.
IMF has already reduced the global growth forecast from 2.9% in 2019 to 3.3% in 2020. Banks should, therefore, be prepared to face these challenges effectively, he added.