The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has favoured persevering with the accommodative stance “as long as it is necessary to revive growth”, according to minutes released by the RBI on Friday. However, some members argued that monetary policy cannot be a permanent stimulus and coordinated fiscal and monetary actions are required to revive the growth.
On October 4, the RBI slashed the repo rate by 25 basis points to 5.15 per cent, taking the total reduction to 135 bps in 2019. GDP growth in the June quarter fell to a 7-year low of 5 per cent.
MPC Member Chetan Ghate said monetary policy cannot be a permanent form of stimulus. “There is always a tension between pro-active risk management and being data dependent. “Growth impulses, however, continue to be weak. Given this, the MPC has been pro-active in adjusting policy as reflected in the quantum of past rate cuts,” Ghate said.
“I had emphasised that while monetary policy is taking the lead as the first line of defence, a full throttle effort by all arms of macroeconomic management is the need of the hour. Over recent weeks, monetary and fiscal actions have been undertaken, and it is important to buttress this coordinated endeavour,” MPC Member and RBI Executive Director Machael Patra said.
According to the minutes of the MPC meeting, RBI Governor Shaktikanta Das said the government has also initiated several measures in recent months, which, together with monetary easing by the Reserve Bank, are gradually expected to work their way through the real economy.
“At the same time, continuing slowdown of the economy requires all out efforts to strengthen private consumption and investment. There is also a need to be watchful of the fiscal situation; however, the government has indicated that it would maintain the fiscal deficit,” Das said.
Das said, “As the inflation scenario remains benign with headline inflation projected at below target in the remaining period of 2019-20 and Q1 of 2020-21, there is policy space to address growth concerns.”
“I also vote for persevering with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target. This enhanced forward guidance on the stance of monetary policy should strengthen monetary transmission and support the real economy,” he said.
Ravindra H Dholakia, MPC member, who proposed a 40-bp reduction in repo rate said, “In my opinion, enough space exists as argued above for a 40 bps reduction in the policy repo rate now with space still existing for future till growth recovers.”
RBI Deputy Governor BP Kanungo said, “While the impact of past policy rate cuts by the MPC is expected to transmit to the real sector gradually, there is a need to reinforce the past monetary policy measures and the recent steps taken by the government in supporting domestic demand. As inflation is projected to remain below the target of 4 per cent till the first quarter of 2020-21, policy space is available to support growth.”
“Macroeconomic data coming in after the last meeting of MPC in August 2019 have further confirmed our serious concerns about the growth slow-down with continued benign inflation outlook,” Dholakia said.