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Informist, Friday, Dec. 20, 2024

 

NEW DELHI – While the Reserve Bank of India's Monetary Policy Committee took note of the growth slowdown in Jul-Sept, it remained unruffled by the seven-quarter low GDP growth print, minutes of the committee's December meeting, released Friday, show. Members of the panel remained confident that the economy would recover from a "transitory" slowdown and inflation would moderate, thus reversing the growth-inflation imbalance seen in the lead-up to the December meeting.

 

"While inflation has surprised on the upside, growth has also surprised on the downside," RBI Executive Director Rajiv Ranjan said in his statement. "As per our assessment, both are likely to reverse their course in the near future. At this juncture, confirmation of durable softening of inflation in the coming months is important." When the committee meets next, in February, Ranjan is likely be the sole surviving RBI representative from this month's meeting. Shaktikanta Das's tenure as RBI governor ended on Dec. 10, and Deputy Governor Michael Patra's term is scheduled to end on Jan. 14.

 

The rate-setting panel on Dec. 6 left the policy repo rate unchanged at 6.50% with a majority of four to two. The committee also retained the 'neutral' policy stance, having adopted it in October from 'withdrawal of accommodation'. The repo rate has been maintained at 6.50% since February 2023.

 

The two dissenting members, Ram Singh and Nagesh Kumar, argued that a policy pivot is required as monetary policy has limited impact on food inflation, which is the sole reason for high inflation at present.

 

"Monetary policy, being a demand management tool, has limitations in addressing inflation largely driven by a supply-side shock driving up vegetable prices," external member Nagesh Kumar said. "I believe that a rate cut would help in reviving economic growth without worsening the inflationary situation, which may soften with seasonal correction in prices," Kumar, who voted for a 25-basis-point rate cut for the second consecutive meeting, added.

 

External member Ram Singh, who also voted in favour of a rate cut at the meeting, said the present situation of significantly slower growth without material changes in the prospects for inflation requires shifting the pivot of monetary policy to a counter-cyclical mode. Both Kumar and Singh said a rate cut would bring down the cost of doing business and may also stimulate private-sector investment as well as consumer demand in the economy.

 

The third external member, Saugata Bhattacharya, said the slowdown in Jul-Sept appeared to be transitory, but some specific weaknesses remain. India's GDP moderated sharply to 5.4% in Jul-Sept, as compared to the Monetary Policy Committee's forecast of 7.0%. "Both data and surveys also point to expectations of an improving growth–inflation balance in the second half of FY25," Bhattacharya said.

 

Ranjan said the sequencing and timing of measures is very important for their effectiveness, highlighting the change in stance to neutral in the October meeting and the 50 bps cut in the cash reserve ratio, which will ensure adequate systemic liquidity.

 

"The need of the hour is to be watchful of the forthcoming data to ascertain the projected improvement in the balance between inflation and growth outlook," the RBI executive director said. "If food price pressures wane on projected lines, this would open up the policy space to normalise rates."

 

Patra, who was probably attending his last meeting of the rate-setting panel, said a durable reduction in inflationary pressures can rekindle growth impulses in a sustained manner. "The expected winter easing of food prices may provide the turning point," the deputy governor said, adding that the monetary policy stance is open to support growth, but must await durable ebbing of inflation, or else "the uneven progress made so far in disinflation will get dissipated".

 

Das, whose term ended just days after the meeting, said that right now the policy priority has to be to restore the inflation-growth balance by bringing down inflation to the 4% target. "As I have pointed out on several occasions, the biggest support for higher growth would come from price stability," Das said.

 

At the February meeting, Ranjan and the three external members will be joined by new RBI Governor Sanjay Malhotra, whose views on the economy are little known so far. The meeting is also likely to be attended by a new deputy governor of the RBI.  End

 

Reported by Shubham Rana

Edited by Rajeev Pai

 

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