Slowing Economy And Limited Investments Forced RBI Gov to Reduce the Repo Rate

Slowing Economy And Limited Investments Forced RBI Gov to Reduce the Repo Rate

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Reserve Bank Governor, RBI, Shaktikanta Das

The slowing economy and subdued private investments prompted RBI Governor Shaktikanta Das to opt for 25 basis points reduction in policy rate earlier this month, as per the minutes of the MPC meeting released.

Das-headed Monetary Policy Committee (MPC) reduced the key policy rate for the fifth time in a row since January, taking the total to 135 basis points.

As per the minutes, Das said that overall, domestic demand has moderated significantly and the weakening of private consumption, which for long has been the bedrock of aggregate demand, is a matter of concern.

Private investment has also lost traction, with the corporate sector reluctant to make fresh investments even though capacity utilisation in the manufacturing sector has operated close to the long-term average in the recent period, he opined during the three-day MPC meeting that concluded on October 4.

He further said the government has also initiated several measures in recent months which, together with monetary easing by the RBI, are gradually expected to work their way through the real economy.

At the same time, continuing slowdown of the economy requires all out efforts to strengthen private consumption and investment, Das said.

"As the inflation scenario remains benign with headline inflation projected at below target in the remaining period of 2019-20 and Q1:2020-21, there is policy space to address growth concerns.

"Hence, I vote for reducing the policy repo rate by 25 basis points," he said.

All the six members of the MPC had voted in favour of a rate cut.

MPC member and RBI Deputy Governor Bibhu Prasad Kanungo said the slowdown of GDP growth in the recent period has been underpinned by deficient domestic demand.

The recent measures initiated by the government should be helpful in supporting domestic demand, especially investment, he said while favouring 25 bps reduction in the repo rate.

MPC member Ravindra H Dholakia, however, favoured a reduction of 40 basis points.

RBI Executive Director Michael Debabrata Patra said that over the recent weeks, monetary and fiscal actions have been undertaken and it is important to buttress this coordinated endeavour. He voted for a 25 bps rate cut.

Pami Dua said the growth-inflation dynamics call for another 25 basis points cut, bringing the cumulative easing this year to 135 basis points.

However, Chetan Ghate, who too voted for a quarter percentage point cut, opined that monetary policy cannot be a permanent form of stimulus.

RBI Repo rate Shaktiknta Das