Reserve Bank of India governor Shaktikanta Das has highlighted several indicators of slowdown in the economy while supporting an aggressive cut of 35 basis points against the normal practice of 25 or 50 basis points change, in the third bi-monthly monetary policy of 2019-20.
The other two members, both independent, in the six-member MPC (Monetary policy Committee) had voted for a 25-basis point cut in the policy announced on August 7.
“Several high frequency indicators for May-June also suggest weakening of services sector activity. Two key indicators of rural demand — tractor and motorcycle sales — continued to contract. Among indicators of urban demand, while passenger vehicle sales contracted in June, domestic air passenger traffic growth turned positive after three consecutive months of contraction. Two key indicators of construction activity — cement production and steel consumption — also contracted/slowed down,” said Das, while arguing that a 25 bps cut will not be enough.
In an unusual move, the Reserve Bank of India (RBI) on August 7 had reduced the benchmark lending rate by 35 basis points to 5.40 per cent amid concerns over slowdown in economy. Before this, the RBI had reduced the rate thrice, each time by 25 basis points.
According to Das, economic activity has shown signs of further weakening since the previous MPC meeting in June 2019. “Inflation expectations of households in the July 2019 round of the RBI’s survey moderated further by 20 bps for the 1-year ahead horizon, though they remained unchanged for the 3-month ahead horizon. Cumulatively, inflation expectations of households have declined significantly by 180 bps for the 3-month horizon and 190 bps for the 1-year horizon in last five survey rounds,” Das said.
"In view of weakening of domestic growth impulses and unsettled global macroeconomic environment, there is a need to bolster dwindling domestic demand and support investment activity, even as the impact of past three rate cuts is gradually working its way to the real economy," said the governor, according to the minutes of the MPC released by the RBI on Wednesday.
The governor said that with headline inflation projected to remain within the target over the next one year, supporting domestic growth by further reducing interest rates needs to be given the utmost priority.
Given the current and evolving inflation and growth scenario at this juncture, it can no longer be a business-as-usual approach, he added.
"The economy needs a larger push. I am, therefore, of the view that a reduction in the policy repo rate by conventional 25 bps will be inadequate. On the other hand, a 50 bps rate cut might be excessive and indicate a knee-jerk reaction," he said.
According to the minutes, Das further said "hence, at times it is apposite" to calibrate the size of the conventional rate adjustment, and he voted for reducing the policy repo rate by 35 basis points and for continuing with the accommodative stance of monetary policy.
MPC members Bibhu Prasad Kanungo (RBI Deputy Governor), Michael Debabrata Patra (RBI Executive Director) and Ravindra H Dholakia (independent member) also favoured a 35-basis point cut in repo rate.
Chetan Ghate and Pami Dua voted for a 25-basis points reduction in the repo or the short-term lending rate.
While the RBI has lowered the repo rate by 1.1 percentage points in 2019, the banks are yet to pass on the entire benefit of lower interest rate to borrowers.
Governor Das recently asked all banks to link their interest rate with repo for faster transmission of the central bank's policy actions.