Reserve Bank of India Governor Shaktikanta Das has said there is clear evidence that the economic activity has been “losing traction” and there is a “need for decisive monetary policy action” to promote growth. Das said this while voting to cut interest rates by 25 basis points during the Monetary Policy Committee’s meeting earlier this month. The minutes of the meeting were released by the RBI on Thursday.
After the three-day meeting in the first week of June, the Reserve Bank of India had lowered the repo rate, or the interest rate at which it lends to commercial banks, by 25 basis points to 5.75%, the lowest in nine years. This was the third time this year that the central bank has cut the rate.
Since the last time the Monetary Policy Committee met in April, greater clarity has emerged about the evolving macroeconomic situation, Das said.
“Overall, there is clear evidence of economic activity losing traction,” the RBI governor said, citing data that showed that the Gross Domestic Product growth in January-March had slowed to 5.8%. “In sum, growth impulses have clearly weakened, while the headline inflation trajectory is projected to remain below 4.0% throughout 2019-’20 even after considering the expected transmission of the past two policy rate cuts. Keeping in view the evolving growth-inflation dynamics, there is a need for decisive monetary policy action.”
He said he was in favour of shifting the stance of monetary policy from neutral to accommodative to send a clear signal that more measures could be taken in the near future to boost growth.
Reserve Bank of India Deputy Governor Viral Acharya said he wanted to highlight an important risk to the central bank’s projected inflation trajectory – fiscal slippages. “Correct economic measurement of the fiscal slippage should factor in the implications of a rising PSBR [Public Sector Borrowing Requirement],” Acharya said, according to the minutes. “Rather than rely solely on the consolidated fiscal deficit figures.”
However, Das said to this: “Over the last few years, the Central Government has by and large followed a policy of fiscal prudence.” He also argued that it would be a mistake to club the borrowings of state-run enterprises into that of the sovereign as they have their own revenue stream from which they could pay out their liabilities.
All six members of the committee – the others being Michael Patra, Ravindra Dholakia, Pami Dua and Chetan Ghate – also voted in favour of reducing the lending rate. “Going forward, the transmission is expected to improve, given the lags with which banks adjust their deposit and lending rates in response to changes in the policy rate,” Das said in conclusion.