MPC members waited to see full impact of rate cuts

Members of the Reserve bank of India’s Monetary Policy Committee preferred to wait to see the full impact of past rate cuts and wait for more policy action from the government in February in deciding to pause the key policy repo rate at 5.15 per cent even as they expect the recent spike in food inflation to be transitory. The central bank also sees some early signs of improvement in the economy.

Though domestic demand conditions have weakened, certain high frequency indicators have improved in the more recent period. There are also some indications that the capex cycle may be turning up as reflected in an increase in the share of funds deployed in fixed assets to 45.6 per cent during first half of 2019-20 from 18.9 per cent during the first half of 2018-19, based on the results of 1539 listed private manufacturing companies, according to the minutes of December meeting of the MPC published by the central bank.

“ I vote for keeping the policy repo rate on hold at the present level of 5.15 per cent in this meeting and for maintaining the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target” said RBI governor Shaktikanta Das. “ There is policy space, the use of which, however, needs to be appropriately timed for ensuring its optimal impact”

The PMI for manufacturing and services improved in November. Rabi sowing is catching up, noted deputy governor, BP Kanungo.

Consumer price inflation, which the central bank tracks to make its inflation forecast s rose 4.6 per cent in October, higher than the central bank’s medium term forecast of 4 per cent as food inflation rose 6.9 per cent as onion prices rose 20 per cent.

The past transmission is still not complete, all the MPC members observed. Weighted average lending rate has fallen by 44 bps (from 29 bps in the last review). “A large quantum of rate cuts has still not been transmitted, and the MPC loses nothing by waiting for a couple of months” Said external member Chetan Ghate, who also observed many positives in the economy including pick up in FDI.

The Households’ inflation expectations increased by 120 bps over the 3-month ahead horizon and 180 bps over the one-year ahead horizon as they adapted to the spike in food prices in recent months. Real GDP growth for 2019-20 has been revised downwards from 6.1 per cent in the October policy to 5.0 per cent – 4.9-5.5 per cent and CPI inflation projection is revised upwards to 5.1-4.7 per cent for the second half of FY’20.

With measures already undertaken by the government to address the growth slowdown expected to play out, and growth initiatives expected to be announced in the upcoming Budget, there is merit in a wait-and-watch approach to see how these measures pan out and impact real economic activity, including investment, going forward, according to external member Pammi Dua.