Clear indication of economy losing traction: RBI Governor at MPC meet

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Clear indication of economy losing traction: RBI Governor at MPC meet

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MUMBAI: With inflation in India well within the monetary policy committee’s (MPC) mandated target, it is crucial to give higher importance to faltering economic growth, members said in the minutes of the June meeting released on Thursday.

The MPC in June cut its key interest rate by 25 basis points, a third straight cut since the start of 2019, while also changing its stance to “accommodative,” after data showed the economy growing at its slowest in more than four years.

“The evolving macroeconomic configuration imparts urgency to strong policy support for the flagging economy in pursuance of the goals set for the MPC,” committee member Michael Patra said.

Asia’s third largest economy grew at a slower-than-expected 5.8% in the last quarter, far below the pace needed to generate jobs for the millions of young Indians entering the labour market each month.

Members broadly suggested that inflation is expected to stay within the MPC’s mandated medium-term target of 4% despite the upside risks.

“When inflation is under reasonable control and upside risks are muted, this is the right time to correct the high real rates of interest,” said Ravindra Dholakia.

Concerns of an uptick in inflation from a sustained rise in food prices, uncertainties related to the monsoon and volatility in international crude oil prices remain and will be monitored, most members said.

“There is an important upside risk to RBI’s projected inflation trajectory that I wish to highlight in particular — that of fiscal slippage,” deputy governor Viral Acharya said.

“The upcoming Union Budget is, therefore, key to understanding the inflation outlook, especially the response to ongoing distress in the agrarian economy, caused in part by low food prices and reflected in low rural inflation.”

Though the minutes suggested that the committee may be open to more rate cuts, not all may be in favour if the budget, to be presented on 5 July, is expansionary.

“Dr. Acharya continues to stay cautious. But after having changed the stance to accommodative, there cannot be an abrupt reversal,” said Rupa Rege Nitsure, chief economist at L&T Financial Holdings.

“He may not support additional rate cuts if fiscal policy pans out to be expansionary. Others will support and majority will rule.”

Annual retail inflation in May was 3.05%, up from the revised 2.99% in the previous month but stayed well below the MPC’s target for a tenth consecutive month.

“It is prudent to create space for future policy action on either side when the conditions are good,” Dholakia said, adding he would recommend proceeding slowly but steadily.

“We still see high probability of one more rate cut likely as early as August,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership.

Source- Livemint.