News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay  » Business » RBI rules out rate cut any time soon

RBI rules out rate cut any time soon

Source: PTI
August 20, 2020 18:24 IST
Get Rediff News in your Inbox:

Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously: RBI's Das.

RBI Governor Shaktikanta Das has emhasised that although there is headroom for further monetary policy action, the "arsenal" has to be kept dry and used judiciously for promoting growth which has been hit hard by the COVID-19 pandemic, according to the MPC minutes released on Thursday.

After a three-day brainstorming earlier this month, all the six members of the Das-headed Monetary Policy Committee (MPC) had opted for a status quo and left interest rates unchanged.


However, the MPC maintained an accommodative stance, implying more rate cuts in future if the need arises to support the coronavirus-hit economy.

As per the minutes, Das also said it would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation.

"It would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation as the staggered opening of the economy progresses, supply bottlenecks ease and the price reporting pattern stabilizes," Das said.

The Governor noted that low capacity utilisation amid subdued domestic and external demand is likely to delay early revival of investment demand.

Real GDP is likely to shrink in the first half of the year, and growth for the full year 2020-21 is estimated to be negative, he said.

Generalised inflationary pressures across food and Consumer Price Index (CPI) excluding food and fuel, in a situation where growth is expected to contract sharply, is a matter of serious concern, Das added.

"As I have been reiterating since October 2019, monetary policy is geared towards supporting the economic recovery process.

“Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously," he said.

He also felt that "we should wait for some more time" for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system and further reduce interest rates and spreads.

Cautioning that outlook for the economy was grim, RBI deputy governor and MPC member Michael Debabrata Patra opined that even when it improves, the expectation is one of slow, hesitant recovery, with the situation likely to worsen before it gets better.

The upticks that easing of lockdowns yield, are likely to be ephemeral and vulnerable to flattening out due to lack of underlying vigour, he said.

A durable revival of the economy depends on sustained policy support to resuscitate activity in various sectors, restore employment, ease financial stresses facing households, businesses and financial intermediaries, instil confidence and anchor financial stability before it slips away, he said.

RBI executive director Mridul K Saggar said the recovery path is inextricably linked to the course the pandemic might take and complete normalisation will be difficult till it is overcome.

External member on the rating setting panel, Ravindra H Dholakia said there are high uncertainties regarding the macroeconomic environment, adding that he was sceptical about the deep stagflationary conditions prevailing in the country.

"Although the present circumstances are truly exceptional, the primary mandate given to MPC for inflation targeting at 4 per cent with the upper tolerance limit of 6 percent has to be respected," said Dholakia.

MPC member Pami Dua was of the view that at this juncture, it is best to adopt a wait and watch strategy and look at incoming data to assess the evolving macroeconomic situation.

"I therefore vote to keep the policy rate unchanged and to continue with an accommodative stance as long as necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target, going forward," Dua said.

External member Chetan Ghate said he has been advocating a more cautious path for policy rate reductions since February 2019.

"However, I have been in a minority in the MPC. Inflation has now been above the upper band of 6 per cent for a number of months.

“Notwithstanding large rate cuts to spur growth over the last year and a half, growth has steadily declined despite 250 bps in cuts since February 2019," Ghate said.

Future MPC meetings should not go soft on inflation, he added.

The next MPC meeting is scheduled to be held during September 29 to October 1, 2020.

Photograph: Francis Mascarenhas/Reuters

Get Rediff News in your Inbox:
Source: PTI© Copyright 2023 PTI. All rights reserved. Republication or redistribution of PTI content, including by framing or similar means, is expressly prohibited without the prior written consent.

Moneywiz Live!