Reserve Bank Of India constrained to cut rates due to rising inflation

RBI  believes that there is more room for further rate cut but it is unable to implement it any time soon due to rising inflation, suggested by  central bank’s last monetary policy committee minutes of the meeting. Reserve Bank of India Governor Shaktikanta Das  said as per the minutes released on Thursday that, “Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously.”

Earlier this month , after a 3 day brainstorming, all the 6 members of the MPC, headed by Mr Das had opted for a status quo and left interest rates unchanged. Though, the has monetary policy committee maintained an accommodative stance, implying more rate cuts in future if the need arises to support the Covid-19 hit economy.

According to the minutes, Governor Das also said that it would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation.

“It would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation as the staggered opening of the economy progresses, supply bottlenecks ease and the price reporting pattern stabilizes,” Das said.

“Inflation surprises of recent months are undermining the MPC’s actions and stymieing its resolve to do what it takes to revive growth and mitigate the impact of COVID-19 on the economy,” Michael Patra, deputy governor wrote in the minutes.

The Monetary Policy Committee is mandated to maintain inflation at 4 % over the medium term and keep it between a 2 % to 6 %  range at all times. A breach of this band for three straight quarters would require the committee to offer an explanation to the government. Inflation has remained above this range in the previous  two quarters.

“This should be a crisis that is not wasted. The government must continue to focus on much needed structural reforms. Some fiscal space should be reserved for later outbreaks,” Chetan Ghate, another MPC member wrote. Almost all members however said that growth is still fragile and that while accurate growth forecasts are not possible at the moment point, the country was likely to see a significant contraction in 2020-21, making it difficult to completely ignore the risks to growth.

Ghate also said that he has been advocating a more cautious path for policy rate reductions since February 2019.

“However, I have been in a minority in the MPC. Inflation has now been above the upper band of 6 per cent for a number of months. Notwithstanding large rate cuts to spur growth over the last year and a half, growth has steadily declined despite 250 bps in cuts since February 2019,” stated Ghate. Future MPC meetings should not go soft on inflation, he also added.

The next MPC meeting is scheduled to held within September 29th September  to 1st October, 2020. 


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