Slower growth calls for countercyclical shift, rate cut: 2 MPC members

While the majority (four) of monetary policy committee (MPC) members voted to maintain the repo rate at 6.50% and adopt a neutral stance, two -- Dr Nagesh Kumar and Prof. Ram Singh -- recommended a repo rate cut of 25 basis points.

According to the RBI's minutes of the MPC meeting report released today, Dr. Nagesh Kumar and Prof. Ram Singh voted to reduce the policy repo rate by 25 basis points. The other four members, Saugata Bhattacharya, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shaktikanta Das voted to keep the policy repo rate "unchanged" at 6.50%.

Dr. Nagesh Kumar argued that a rate cut would help in reviving economic growth without worsening the inflationary situation, which may soften with seasonal correction in prices. He suggested the MPC should also explore the use of non-rate measures for enhancing liquidity, such as a 50-basis point cut in CRR, to enhance liquidity.

The RBI in its policy announcement on December 6, 2024, had kept the repo rate "unchanged" at 6.5% for the 11th time in a row, while continuing with a 'neutral' policy stance. The RBI slashed the cash reserve ratio (CRR) to 4% from the existing 4.5%, with expectations that it would lead to the release of Rs 1.16 lakh crore liquidity to banks and boost lending.

Dr Kumar said since the October 2024 MPC Meeting, economic conditions have "worsened dramatically" on both economic growth and inflation fronts. "The decline in the Q2 2024-25 growth numbers from 8.2% achieved in 2023-24 and from 6.7% on Q1 2024-25 to just 5.4% is much sharper than expected. The extent of the slowdown is serious enough to warrant policy attention."

He said the slowdown largely reflects the weakness of the industrial sector, leading to deterioration in the employment sentiment in Q2. The factors driving growth slowdown are the slowdown of both consumption and investment, he argued. "The policy responses to address the challenges of high inflation and growth slowdown should look into their determinants."

He maintained that the slowdown in the manufacturing sector can be addressed by bringing down the cost of capital, which may stimulate investments as well as consumer demand. "Hence, a rate cut could help."

Prof. Singh also voted to reduce the policy repo rate by 25 basis points to 6.25%, while favouring the ‘neutral’ stance.

The MPC's mandate is to ensure price stability while supporting growth, he argued. "The present situation of significantly slower growth without material changes in the prospects for inflation requires shifting the pivot of monetary policy to a countercyclical mode."

He said a rate cut would reduce the costs of doing business and increase the opportunity cost of holding on to cash for firms and companies. A growth-supportive monetary policy is also consistent with the international scenario, he said. "In most of the big developed markets, the central banks have already cut benchmark interest rates."

He argued that it would be "more plausible" to aim for price stability within a range rather than aiming to bring CPI inflation to a point target of 4%. The costs of trying to shoot at the point target in every state of the uncertainty-ridden future can be "unjustifiably high", he said.