Imperative that monetary and fiscal policies work in close coordination: RBI Policy minutes

Reserve Bank of India (RBI) Governor Shaktikanta Das called for close coordination between measures taken by the central bank and the government in order to address the current slowdown in the economy, according to the minutes of the December policy review meeting.

While there is policy space for a future rate reduction, the cuts need to be appropriately timed to ensure optimal impact, he added.

“The next budget is due for presentation in about two months and it will provide greater clarity about the further measures that the government may initiate. It is imperative that monetary and fiscal policies work in close coordination,” Das said, adding that the impact of recent counter-cyclical measures taken by the centre is playing out.

The RBI, on December 19, released the minutes of the Monetary Policy Committee (MPC) meeting held on December 5.

As per the minutes, MPC member and RBI executive director Micheal Patra said that the weakness in real economy is likely to continue, if not weaken further, into the third quarter.

“In particular, the sharp downturn in the growth of investment calls for urgent policy responses, reinforcing the actions already taken,” Patra said, adding that it may require rekindling of animal spirits in a business-conducive environment.

MPC member Ravindra Dholakia said that it is important to wait for clarity of the government’s commitment and action to tackle the growth slowdown before further action on the monetary front.

Dholakia also said that the government’s fiscal discipline target of 3 percent of GDP under current circumstances should not be overemphasized and can be temporarily ignored. “In my opinion, therefore, the slippage of more than 50 basis points may also be justified under the present circumstances,” Dholakia said.

MPC members noted that the sharp rise in food inflation is likely to sustain for next two-three months and more clarity is awaited as fresh data pours in, going ahead.

All six members of the MPC had voted in favour of the pause in the December policy review meeting, leaving the repo rate unchanged at 5.15 percent. The repo rate was lowered by 135 basis points in five back-to-back cuts between February-October 2019.

The move came as a surprise for markets that were largely expecting a rate cut of at least 25 basis points on December 5.

The MPC also decided to continue with the accommodative stance as there is room available for rate cuts going ahead, but it will also monitor inflation data in coming months to get more clarity on movement in prices.

Other MPC members include Chetan Ghate, Pami Dua and RBI Deputy Governor BP Kanungo.