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RBI says govt’s counter-cyclical measures beginning to play out

The Reserve Bank of India (RBI) remains concerned about the slower pace of rate cut transmission in the economy while the sudden spurt in food inflation, though seasonal, seems to have put policy makers at the central bank on alert.

Minutes of the December 3-5 policy review of the Monetary Policy Committee (MPC), released on Thursday, showed several uncertainties continued to cloud RBI’s growth-inflation outlook. While the MPC members acknowledged that the recent surge in food inflation could be transitory and it should ease as soon as the late kharif output hits the market, they opted to wait for greater clarity on the overall food inflation path, which could be the reason why the central bank didn’t delivered the much-expected rate cut this time around.

RBI Governor Shaktikanta Das said that the impact of recent counter-cyclical measures taken by the government was starting to play out, while stressing that it was imperative that monetary and fiscal policies should work in close coordination.

Das also acknowledged that the economic activity has continued to weaken with GDP growth decelerating for the sixth consecutive quarter for the second quarter of 2019-20.

Of the two main components of GDP, while investment activity weakened further, private consumption showed signs of recovery, he pointed out.

He said the Budget is due in about two months, and it will provide greater clarity about the further measures that the government may initiate.

“Beyond Q2, however, some positive signs have emerged. Rabi sowing has caught up considerably from the setback caused by delay in kharif harvesting and unseasonal rainfall in October and early November,” Das said.

Here’s what other MPC members said in the three-day RBI policy meet:

Chetan Ghate:

  • Since the last review, there has been a sharp spike in both the 3-month ahead (by 120 bps) inflationary expectations from 8 per cent to 9.2 per cent and 1-year ahead (by 180 bps) inflationary expectations from 8.1 per cent to 9.9 per cent.
  • October food inflation printed at 6.9 per cent which is a 39-month high.
  • Economic growth continues to be lacklustre.
  • Counter-cyclical monetary policy has not been as effective as expected due to inadequate monetary policy transmission.
  • A few positive factors have emerged since the last review, suggesting that a wait-and-watch approach is appropriate.
  • In the rural sector, weak demand conditions add to the prospect of a “one-legged” recovery driven by the urban sector

Pami Dua

  • The increase in prices of vegetables is expected to continue in the near future, but moderate by February 2020
  • Excluding government final consumption expenditure, GDP growth is 3.1 per cent, underlining the weakness in private domestic demand.
  • Overall, private consumption and investment activity are weak, and business and consumer sentiment are somewhat downbeat.
  • On the international front, some signs of a cyclical upturn in global industrial growth are now in sight.
  • The policy heavy-lifting to reverse the growth slowdown has to be a multi-pronged approach.
  • Lacklustre revenue collections, alongside lower nominal GDP growth rate add to the risk of fiscal slippage.

Ravindra H Dholakia

  • It is prudent to wait and watch out for clarity on growth – inflation dynamics and gain some more confidence at this juncture before taking a decisive action on the policy rate front.
  • Although the capacity utilization as per the early results of RBI survey has fallen substantially to less than 70 per cent in Q2 of 2019-20, there are several green shoots of growth recovery in the economy.
  • The growth recovery has to be addressed fundamentally and durably by the fiscal policy with the monetary policy, if at all, playing only a facilitating role.

Michael Debabrata Patra

  • Arguably, the slump in real GDP growth warrants accommodative monetary policy actions and stance whereas the upturn in headline inflation for the third month in succession after a quiescent phase of nine months calls for an opposite response or at least status quo until there is ground to infer that the food price spirals that are driving it are on the ebb.
  • The key question is: will the upside in other food prices reverse or persist, especially those of pulses and milk? If it persists, will it spill over into non-food inflation? This too warrants close monitoring of incoming data over the next few months and, therefore, a pause.
  • Turning to the real economy, the weakness in overall activity may likely prolong into Q3, if not turn weaker.

Bibhu Prasad Kanungo

  • On the inflation front, unseasonal rains in October and early November damaged certain crops and also disrupted the mandi arrival patterns. As a result, the temporary demand supply imbalance led to price pressures in several vegetables, especially onion prices.
  • The headline inflation path for H2: 2019-20 is projected to rise to 5.1 to 4.7 per cent now as against 3.5 to 3.7 per cent earlier. However, inflation will moderate gradually below the target in Q2:2020-21.
  • The current uptick in inflation driven by a sharp increase in food prices is expected to reverse. However, there exists considerable uncertainty on the food price trajectory, and the quantum of impact of unseasonal rains on kharif output would be known only early next year.

Source: Economic Times