RBI’s rate cut sig­nals de­sire to bol­ster growth mo­men­tum

But MPC fails to flag fis­cal slip­pages, which can hurt pri­vate in­vest­ment

Business Standard - - OPINION -

Barely four months af­ter the Re­serve Bank of In­dia switched its mon­e­tary pol­icy stance to one of “cal­i­brated tight­en­ing”, sig­nalling in­ter­est rates were set to trend higher, it has re­versed direc­tion. Not only did the RBI’s mon­e­tary pol­icy com­mit­tee unan­i­mously opt to re­vert to a “neu­tral” pos­ture, but the rate-set­ting panel un­ex­pect­edly de­cided, by a 4-2 ma­jor­ity, to cut the bench­mark repo rate by 25 ba­sis points, to 6.25 per cent. The MPC’s rea­son­ing has been fairly straight­for­ward. With Con­sumer Price In­dex-based in­fla­tion hav­ing con­tin­ued to slow and pro­jected to stay well be­low the medium-term tar­get of four per cent till at least the Oc­to­ber-De­cem­ber quar­ter, the MPC saw an op­por­tune mo­ment to pivot to a growth-sup­port­ive stance. That there is a need to bol­ster eco­nomic mo­men­tum is ev­i­dent from the RBI’s down­ward re­vi­sion of the fore­cast for growth in the first half of the next fis­cal year. The pro­jec­tion has been low­ered to a range of 7.2-7.4 per cent, from 7.5 per cent posited in the RBI’s De­cem­ber state­ment, as mod­er­at­ing global growth and slow­ing over­seas de­mand add un­cer­tain­ties to the pre­vail­ing do­mes­tic im­bal­ances.

In­ex­pli­ca­bly, how­ever, the RBI’s pol­icy state­ment fails to make any men­tion of its hith­erto abid­ing con­cern about fis­cal pru­dence. With the In­terim Bud­get show­ing some slip­page from the fis­cal roadmap and pro­ject­ing a bud­get deficit of 3.4 per cent for both the cur­rent fi­nan­cial year and the next, the risk of gov­ern­ment bor­row­ing crowd­ing out pri­vate in­vest­ment de­mand re­mains tan­gi­bly real.

The Hindu, Fe­bru­ary 8

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