MUMBAI: The RBI
governor Shaktikanta Das
voted for a rate cut
in the February 7 monetary policy committee (MPC) meeting as growth momentum in the economy had eased. However, his deputy Viral Acharya
voted against a cut over concerns that decline in food prices might not last.
Adding to the governor’s concerns was the fact that global growth was losing traction amid lingering trade tensions and uncertainty around Brexit
. “Growth impulses have weakened and there is a need to spur private investment and strengthen private consumption, especially in the wake of slowing global growth,” said Das during the MPC meeting, the minutes of which were released by the RBI on Thursday.
In the policy meet, all six members had voted in favour of changing the stance of the monetary policy from calibrated tightening to neutral. However, Acharya was the lone voice against a rate cut. While credit growth was strong, the governor pointed out that it was not broad-based. “Credit flows to industry, in particular, have been anaemic, credit to micro and small industry contracted in December 2018, while credit to large industry expanded at a moderate pace,” said Das.
Acharya was, however, more concerned about inflation despite lower headline numbers and food prices remaining subdued. “Inflation, excluding food and fuel, remains elevated and persistent, so it seems crucial to understand if the sharp increase in momentum observed in health and education components is one-off or not. While it seems reasonable to treat it as one-off for now, if it does sustain then it could push inflation, excluding food and fuel, into uncomfortable territory,” said Acharya in the statement, explaining his rationale for voting in favour of holding rates.
The release of RBI’s minutes of the MPC coincided with the governor’s meeting with banks on transmission of policy rates. Bank chiefs have said that their marginal cost of lending rate (MCLR) would not decline without a fall in cost of borrowing. Some banks have said that they might see a decline in cost of funds upon release of recapitalisation funds from the central government. Others said that the RBI would need to cut reserve requirements in order to bring down interest rate immediately.
“We expect banks to cut lending rates by 50 basis points (bp) by March 2020 reversing the 30bp hike in 2018. Governor Das has already defused the end-2018 liquidity crunch with the open market operations calendar for the March quarter. Second, we expect the RBI MPC to cut another 25bp rate cut on April 4 with February inflation tracking a lowly 2.5%,” said Indranil Sen Gupta, economist, DSP Merrill Lynch.