With a 35 bps rate cut bonanza, Reserve Bank of India gifts Centre what it has been asking for; what now?

Four members of the Monetary Policy Committee (MPC), including Reserve Bank of India (RBI) governor Shaktikanta Das voted for a 35 basis points rate cut on Wednesday. One bps is one-hundredth of a percentage point. Two members of the MPC voted in favour of a 25 bps cut. A 35 bps cut is something that has never happened in the past. With this, the repo rate at which the RBI lends to banks is at the lowest rate in nine years. What might have prompted the MPC to go in for an unconventional figure that is in the middle range of a widely expected 25 bps and an aggressive 50 bps? The only possible explanation is that the MPC is a divided house on the interest rate course and today’s 35 bps is a consensus outcome between the growth and inflation lobby, the first pitching for nothing less than a sizeable monetary stimulus to salvage the shrinking economy from the present grave situation while the latter pitching for a token cut also considering the upside risks to the inflation projection. [caption id=“attachment_5717441” align=“alignleft” width=“380”]  File image of RBI governor Shaktikanta Das. News18[/caption] Of course, as the outcome suggests, the growth lobby consisting of the governor himself has had the last laugh in the MPC meet. There is a clear tilt now towards slowing growth and inflation concerns have clearly taken a backseat. This is also evident from the commentary linked to the downward revision of FY19-20 GDP growth forecast. “Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish,” the statement notes, adding ‘addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate.’ This is also a clear message to the government that it needs to urgently act on the fiscal solutions to generate demand and get back private investments. Core sector growth dropped to a four-year low of 0.2 percent dragged by significant weakness across all major segments—steel, cement, electricity industries and refinery products. The May figure has been revised downwards to 4.3 percent from the earlier estimate of 5.1 percent. Also, global analytical firm CRISIL has cut India’s GDP growth forecast for this fiscal by 20 basis points to 6.9 percent citing weak monsoon, slowing global growth, and sluggish high-frequency data for the first quarter. The eight-core sector industries had expanded by 7.8 percent in June last year. These core industries comprise 40.27 percent of the weight of items included in the Index of Industrial Production (IIP). The demand slump has been visible most in the auto sector with the sales plummeting for nearly a year now, also leading to job losses and production cuts. But at this stage, the government doesn’t seem to have acknowledged the gravity of the economic downturn, forget about putting in an exigency plan. That passes the pressure to the MPC to keep cutting rates till the time it runs out of ammunition. That’s still some time away. As of now, it is certain that there are more rate cuts on cards.

Today, by gifting an unconventional 35 bps rate cut, the MPC has delivered what the government wanted. There are more rate cuts on the way. The rate-setting panel itself is promising future rate cuts in the policy statement: ‘Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap.’

The policy stance remains accommodative. Expect more fireworks later this year. But the important question is this: Can mere monetary stimulus work wonders in an economy that is battered by severe structural slowdown? The answer isn’t hard to find out.