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Comment | Credit policy meeting minutes show April rate cut is not a given

It appears that those members who voted for a rate cut have factored in all the positives about inflation. The focus has definitely shifted to growth, but alarm bells aren’t ringing yet.

February 21, 2019 / 07:59 PM IST
Representative image

Representative image

Why did the Reserve Bank of India’s rate setting committee vote for a surprise rate cut earlier this month?

Twitter user Indradeep Khan sums it up pithily, even if grammatically incorrect: We are the only country cutting rates because potato prices are negative.

The minutes of the monetary policy committee (MPC) meeting confirm this hypothesis, but also suggest that in the absence of a growth shock, a follow-up rate cut may not happen in April.

The key takeaway from the minutes is this: Inflation over the next 12 months will rise but reach only 3.9 percent by December 2019 mostly because food prices are expected to be benign. However, slowing global growth could weigh on domestic economic growth. With headline inflation under control, it’s time to support growth.

In the words of RBI director Michael Patra, the critical judgment call is whether the momentum of food prices reverts to the typical pattern of rising through the summer months. Patra believes that it will take some time for food prices to rise because  of excess supply in several items, which is the majority view.


However, that’s a U-turn from Patra’s views two months earlier when he said, “In my view, the Indian economy is experiencing the onset of positive supply shocks as reflected in the sizable easing of prices of food and petroleum products, which could reverse.”

But sustained food deflation, will have other costs, deputy governor Viral Acharya pointed out. In his opinion, this feeds into the agrarian distress. The government will then have to provide fiscal support to the agrarian economy – we have already seen this in the form of the PM KISAN scheme. That in turn will not only boost rural demand and rural wages, but could also get generalised into headline inflation.

Indeed, Viral Acharya and Chetan Ghate, the two who voted against the cut, both expressed concerns about  fiscal slippages and also core inflation. Other members, of course, have chosen to see through core inflation and have also played down the sharp increase in momentum of health and education services inflation. These still ruled at a respective 8.93 percent and 7.99 percent in January, even if that was an improvement from December.

Coming to growth, the main worry seems to be that slowing global growth will impact domestic economic growth, with three members stressing this point. However, Patra also noted that “domestic activity remains resilient” while Ghate saw the “growth picture as robust despite the emergence of soft spots.”

Sure, high frequency indicators such as decelerating auto and durable sales, and capital good production point to a loss of momentum in consumption demand and investment. However, as Pami Dua points out, GDP is expected to grow by 7.2 percent in the first quarter of 2019-20, rising to 7.5 percent in the third quarter.

Is that enough? Ravindra H Dholakia says that India’s economy has the potential to grow at 8-8.5 percent (as opposed to the popular 7-7.5 percent), and thus the output gap (the difference between actual and potential output) has increased. But even he thinks that  the space has opened up for only a 50-60 basis points rate cut, of which 25 basis points is already done.

What’s one to make out of all this?

It appears that those members who voted for a rate cut have factored in all the positives about inflation. The focus has definitely shifted to growth, but alarm bells aren’t ringing yet. Thus, the minutes suggest that unless there is a substantial growth shock when the third quarter GDP numbers are released next week, the MPC might decide to hold its fire.

In any case, markets seem to have shrugged off the rate cut. Ten-year bond yields haven’t budged by much since 6 February while equities have actually fallen. But that’s owing to a variety of other factor such as the Pulwama attacks and election uncertainty.

Ravi Krishnan
first published: Feb 21, 2019 07:59 pm

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