The Monetary Policy Committee’s decision, at its maiden meeting, to >cut the benchmark repurchase (repo) rate by 25 basis points held no surprise for markets. What had been on watch was the language of the policy statement, the extent of consensus in the committee and the manner in which the new Reserve Bank of India Governor and chairman of the MPC, Urjit Patel, presented the central bank’s positions. Articulating the main concern that informed the newly constituted rate-setting panel’s rationale for reducing interest rates, Mr. Patel said the global demand environment was clearly looking far bleaker than previously anticipated, with the forecast for world economic growth set to be downgraded further. The focus, he signalled, therefore needs to remain on supporting the domestic economy through an accommodative monetary stance. That the MPC has opted to lay primacy on ‘supporting growth’ while keeping its sights firmly trained on the RBI’s central remit to target a medium-term retail inflation objective of 4 per cent, within a band of plus/minus 2 per cent, bodes well. Decision-making by committee is never easy, and given the short time the MPC had since its constitution last month, the lucidity of the policy statement shows its six members have hit the ground running. While the minutes of the meeting — that will reveal each member’s arguments — will become available on October 18, all six voted for the rate cut. The decision reflects the broad consensus that the risks to growth from global uncertainty and financial markets volatility remain high, especially ahead of the U.S. presidential election, and that a rate stimulus was warranted given the recent slowing in retail inflation.
Even as it expects an improvement in the outlook for food inflation on the back of increased sowing and supply management measures undertaken by the government, the MPC has been cautious in flagging the risks to the trajectory for price gains. In the panel’s opinion, the main factors that could play a contributory role in furthering a fresh ‘cost spiral’ would be the higher house rent allowances mandated by the Seventh Pay Commission, the increase in minimum wages and the possible spillovers through minimum support prices. Multiple factors augur well for the outlook for both the industrial and services sectors. But the worsening trade demand could offset the gross value added (GVA) momentum, the MPC noted, while retaining the RBI’s GVA growth forecast of 7.6 per cent. That the panel has made a decisive start to rate-setting through deliberation is clear; how it weathers harsher domestic and external challenges, should they emerge, remains to be seen.