Third time rate cut to address growth concerns, says MPC

The Reserve Bank of India (RBI)’s decision to reduce the interest rate for the third consecutive time was aimed at addressing growth concerns, with inflation staying well within the mandated target.

According to the minutes of the RBI’s monetary policy committee meeting, which was held earlier in June, all the six members were in favour of the rate cut. RBI has also changed the stance of the monetary policy to accommodative from neutral.

“Growth impulses have clearly weakened, while the headline inflation trajectory is projected to remain below 4% throughout 2019-20 even after considering the expected transmission of the past two policy rate cuts,” RBI Governor Shaktikanta Das observed.

“Keeping in view the evolving growth-inflation dynamics, there is a need for decisive monetary policy action,” he said, adding he voted to shift the stance of monetary policy to send a clear signal.

The country’s GDP growth slowed to 5.8% in January-March 2018-19 , dragging down the full year growth to a five-year low of 6.8%.

Viral Acharya, the Deputy Governor in-charge of monetary policy, who voted against rate cut in the previous two occasions, voted for a rate cut, despite a ‘dilemma’.

“In spite of my dilemma, I vote — albeit with some hesitation — to frontload the policy rate cut.

This would provide an insurance to help prevent the output gap from widening further or the finance-neutral output gap (FNOG) from turning negative,” Mr. Acharya said.

He argued that a fiscal slippage of 50 basis points or an oil price increase of 10% left no space to cut the policy rate below 6%.

RBI had decided to cut the repo rate in the policy by 25 basis points to 5.75%. The repo rate fell below 6% for the first time since 2010.

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Printable version | May 27, 2022 2:24:44 pm |