RBI MPC Minutes: Members See Space For Rate Cut, But 'Foggy Outlook' Suggests Caution

While there is policy space to further cut the policy rate, this is not the opportune time for the same as it will not have the desirable impact, Reserve Bank of India (RBI) Governor Sanjay Malhotra said in the Monetary Policy Committee minutes published on Wednesday.

The RBI MPC, led by the Governor, retained the benchmark repo rate at 5.5% at its meet earlier this month. The RBI revised the consumer price index (CPI) inflation forecast downward while revising the Gross domestic product (GDP) growth forecast upward at the meet.

Explaining the rationale behind his vote to retain the benchmark lending rate at 5.5%, he said that several growth-inducing policies unveiled by the Government and the Reserve Bank should help growth, going ahead. The cumulative impact of fiscal and monetary measures is yet to be realised fully, he said, adding that tariff-related uncertainties are still evolving and there is elevated uncertainty on the external front.

Even though growth is strong by current reckoning, its outlook is softer and is expected to be below our aspirations. The benign outlook for headline and core inflation as a result of the downward revision of projections opens up policy space to further support growth.

The intent of policy, nevertheless, is to continue to facilitate growth-enabling conditions, the Governor said. Explaining his decision to maintain stance at neutral, a change would tantamount to giving a definitive forward guidance about the future trajectory of the policy rate, he said.

"The policy uncertainty, rapidly evolving developments and the foggy outlook suggest that we exercise caution and take a view for each policy as per the then prevailing macroeconomic conditions and outlook," he said.

Deputy Governor Poonam Gupta also said that the growth-inflation mix, particularly slower growth in H2 and a benign inflation rate, has potentially opened some space for lowering the policy rates further; "yet it is difficult for me to vote for a rate cut at this juncture," she said.

This is for the following reasons — first, while the recent measures announced by the government have significantly bolstered consumer sentiment, these measures are still working their way through, Gupta said. It would be prudent for the impact of these measures to be sufficiently realized before taking another supportive measure right away, she explained.

Second, even the policy rate cuts announced by the RBI during this calendar year are currently being transmitted through the system. Announcing a rate cut at this time may only be marginally effective.

Third, the global uncertainties are evolving at a very fast pace.

"There is ample scope for an additional rate cut. The question is: Is there a need for one during this policy cycle?," asked external member Ram Singh.

When the impact of the demand boost from the 100 bps cuts in repo rates this year is yet to play out fully, a further rate cut today runs the risk of an overdose, he said. The intended effects of the monetary easing and the fiscal measures are still working through the system.

The available scope for rates can be leveraged to sustain the growth momentum for a longer period by extending the easing cycle, he said.