Mumbai: Reserve Bank Governor Shaktikanta Das has said that there is room for rate cut but monetary policy action would depend upon the evolving situation on the inflation front which is currently above the tolerance level of the central bank.
I recognise that there exists space for future rate cuts if the inflation evolves in line with our expectations. This space needs to be used judiciously to support recovery in growth, opined the governor as per the minutes of the Monetary Policy Committee (MPC) released by the Reserve Bank of India (RBI).
The reconstituted MPC, which met from October 7 to 9, had decided to keep the benchmark lending rates unchanged in view of the hardening of retail inflation.
Das said after the sharpest contraction in economic activity in the first quarter of 2020-21, a number of high frequency indicators of economic activity for the second quarter suggest a sequential improvement.
“There are, however, downside uncertainties that could put sand in the wheels of this nascent recovery. Primary among them is the risk of a second wave of COVID-19. Private investment activity is likely to be subdued, even as domestic financial conditions have eased significantly,” he said.
External demand is also expected to remain anaemic with sharp contraction in global economic activity and trade.
As per RBI, the full year gross domestic product (GDP) is expected to contract by 9.5 per cent with a strong rebound next year.
“On the outlook for inflation, food inflation should moderate going forward on a combination of good kharif harvest and a favourable rabi season,” the Governor said.
As per the RBI’s assessment, headline inflation would moderate in H2 of the current year and further in Q1 of next fiscal year.
Inflation remained above the upper tolerance threshold of 6 per cent since June, with signs of aggravation of price pressures. The government has asked RBI to keep inflation at 4 per cent (+, – 2 per cent).
Deputy Governor and MPC member Michael Debabrata Patra noted that India has entered a technical recession in the first half of the year for the first time in its history.
“GDP is an aggregative indicator of economic activity and hides the extent of human misery and the loss of social and human capital caused by the health crisis.
“Nonetheless, if the projections hold, the level of GDP would have fallen approximately 6 per cent below its pre-COVID level by the end of 2020-21 and it may take years to regain this lost output,” he said.
While voting for keeping the interest rate unchanged, RBI Executive Director Mridul K Saggar expressed concern that if current real negative interest rates fall further, it may generate significant distortions that could adversely affect aggregate savings, current account and medium-term growth in the economy.
“With retail fixed deposit rates currently ranging between 4.90-5.50 per cent for tenors of 1-year or more and the headline inflation prevailing above that for some months now, there has been a negative carry for savers. While expected future inflation is lower and leaves some policy room, it is prudent to hold policy rates for now,” he said.
All the three new members of the MPC — Shashanka Bhide, Ashima Goyal and Jayanth R Varma — too voted for keeping the policy rate unchanged.
Also read: India at the doorstep of economic revival, says RBI governor Shaktikanta Das