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  • Growth impulses have weakened significantly: Minutes of the Monetary Policy Committee Meeting
  • June 20,2019  18:28
  • The seventeenth meeting of the Monetary Policy Committee (MPC) was held during June 3, 4 and 6, 2019 at the Reserve Bank of India, Mumbai. The meeting was attended by all the members - Dr. Chetan Ghate, Professor, Indian Statistical Institute; Dr. Pami Dua, Director, Delhi School of Economics; Dr. Ravindra H. Dholakia, former Professor, Indian Institute of Management, Ahmedabad; Dr. Michael Debabrata Patra, Executive Director; Dr. Viral V. Acharya, Deputy Governor in charge of monetary policy - and was chaired by Shaktikanta Das, Governor.

    The MPC reviewed the surveys conducted by the Reserve Bank to gauge consumer confidence, households' inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters. The MPC also reviewed in detail staff's macroeconomic projections, and alternative scenarios around various risks to the outlook. Drawing on the above and after extensive discussions on the stance of monetary policy, the MPC adopted the resolution that is set out below.

    The MPC noted that growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts. Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate.

    Against this backdrop, all members of the MPC (Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Shaktikanta Das) unanimously decided to reduce the policy repo rate by 25 bps and change the stance of monetary policy from neutral to accommodative.

    As per the minutes of the MPC's meeting following statements were given by the members

    Statement by Dr. Chetan Ghate

    A widening negative output gap and below target inflation warrants a monetary policy response. A rate cut at the current juncture would help both close the output gap and bring inflation back to target, a situation of “divine-coincidence”. Going forward, I will remain data dependent, and will carefully watch the incoming growth and inflation data. I vote to cut the policy rate by 25 bps, and shift the stance to accommodative.

    Statement by Dr. Pami Dua

    India's Gross Domestic Product (GDP) growth in Q4:2018-19 decelerated sharply to a 20-quarter low of 5.8%. Further, the gloomy global scenario also highlights the fact that India cannot rely on external engines of growth in the current circumstances. Thus, an internal boost to demand would be the preferable option. Thus, given the deceleration in growth and in the context of projected headline inflation remaining below the target in 2019-20, I vote for a rate cut of 25 bps. To reinforce this, in an attempt to boost sentiment, I also vote to change the stance from neutral to accommodative.

    Statement by Dr. Ravindra H. Dholakia

    In the MPC meeting of April 2019, I had clearly stated that there was a considerable space of about 75 bps to cut policy rate further and voted for a 25 bps reduction with a change of stance from neutral to accommodative. Subsequent developments have further opened up the space by about 20-25 bps. Real interest rates are very high in the economy adversely impacting costs and thereby our global competitiveness.

    In my opinion, we should continue correcting our real interest rates by bringing down our policy rate. I, therefore, vote for changing the stance to accommodative and reducing the policy rate further by 25 bps, although I would have preferred to cut it by 40 bps this time.

    It is prudent to create space for future policy action on either side when the conditions are good. When inflation is under reasonable control and upside risks are muted, this is the right time to correct the high real rates of interest. However, we have to be careful to avoid any knee-jerk reactions and proceed slowly but steadily. It is in this context that it is still not too late in my opinion to change the stance from neutral to accommodative by reducing the policy rate further by 25 bps.

    Statement by Dr. Michael Debabrata Patra

    In my view, the evolving macroeconomic configuration imparts urgency to strong policy support for the flagging economy in pursuance of the goals set for the MPC. In fact, with inflation projected to remain below target, a higher weight needs to be assigned to growth relative to previous meetings.

    Most important at this juncture: monetary policy by itself cannot bring about a reinvigoration of economic activity. Monetary policy is taking the lead as the first line of defence, but a coordinated full throttle effort by all arms of macroeconomic management is the need of the hour.

    On these considerations, I vote for a 25 bps reduction in the policy rate and a change in the stance of monetary policy to accommodation.

    Statement by Dr. Viral V. Acharya

    I vote - albeit with some hesitation - to frontload the policy rate cut from 6% to 5.75% (a 50 bps rate cut from my April vote to keep the policy rate at 6.25%). This would provide an insurance to help prevent the output gap from widening further or the finance-neutral output gap (FNOG) from turning negative. The MPC will need to remain on guard and be prepared to provide such insurance in a symmetric manner if upside risks to inflation were to materialize.

    I also vote to change the monetary policy stance from neutral to accommodative. This is because the uncertainty around the upside risks to inflation I have highlighted will resolve only gradually over the next few months and can be factored into future MPC decisions in a data-dependent manner, but seem highly unlikely to lead to a rate hike at the next policy.

    Statement by Shaktikanta Das

    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. Hence, my vote is to reduce the policy repo rate by 25 bps. My vote is also to shift the stance of monetary policy from neutral to accommodative to send a clear signal.

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