RBI minutes: MPC members feel economy still hasn't bottomed out

NEW DELHI: The Reserve Bank of India (RBI) remained concerned about the slower pace of growth in Indian economy amid uncertain macroeconomic data, minutes of the February policy meeting of the Monetary Policy Committee (MPC), showed on Thursday.

Deputy Governor Michael Debabrata Patra said that high-frequency indicators were not offering definitive evidence yet that the downturn was bottoming out. However, he saw growth in specific sectors, but they were far from gaining economy-wide traction.

“As foretold in December, the MPC has entered what I call the tunnel of testing trade-offs (TTT),” said Patra, adding that the monetary policy has headroom to respond to the evolving macroeconomic configuration.

Of late, wholesale prices-based inflation accelerated to a 10-month high of 3.10 per cent in January mainly due to costlier food articles, while retail inflation jumped to a 68-month high of 7.59 per cent.

Governor Shaktikanta Das added that the global economic activity slowed down and the prospects had weakened even further with the outbreak of coronavirus, as China is the second-largest economy, and it was a key player in the global supply chain.

However, he believed that some green shoots are, however, visible in Indian economy with rabi sowing higher by 9.5 per cent. Besides, horticulture production has also risen to a record level in 2019-20. This bodes well for farm incomes and boosting rural demand.

Commenting on Union Budget, he said the government has sought to provide counter-cyclical support to the economy while broadly adhering to fiscal prudence.

“Monetary transmission and bank credit flows have improved, but they need to become stronger. While the macroeconomy needs further monetary stimulus, the inflation outlook continues to be uncertain,” said Das.

He added that the path of headline inflation was expected to moderate, but given the prevailing uncertainty, it was prudent to wait for more clarity based on incoming data.

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

Janak Raj
a) Headline inflation surged during the last three months, driven mainly by an unprecedented spike in onion prices.

b) Domestic economic activity has remained weak with GDP growth estimated at 5.0 per cent for 2019-20 being the lowest in the last 11 years.

c) Some of the major factors that have contributed to the growth slowdown are (i) ongoing deleveraging by the private corporate sector; (ii) continuing large inventory overhang in the residential real estate market; (iii) issues facing the auto sector; (iv) decline in income levels in rural areas due to low food prices in previous two years and deceleration in the growth of wages of agriculture and non-agricultural labourers; and (v) global uncertainties, especially trade tensions. All these factors have reduced aggregate demand by impacting investment and private consumption.

d) Global uncertainties relating to trade tensions and Brexit have abated, a new uncertainty from coronavirus has arisen. It is expected that the epidemic of coronavirus will be overcome soon. However, should it prolong and spread, it will have ramifications for the global economy and its net impact on the Indian economy might be negative even if oil and other global commodity prices decline.

Ravindra Dholakia
a) The headline CPI inflation going forward is expected to show a declining trend for at least a year to come. Some new uncertainties have, however, emerged that could need some policy space for the future.

b) Moreover, Budget has presented a fiscal policy of the Centre that borders on being contractionary rather than expansionary on misplaced concerns about fiscal slippage in the face of a serious growth slowdown.

c) Budget has been presented with no major impact on both growth and inflation in my opinion. As a result, there is no risk of output gap closing rapidly in the short to medium term. Global growth slowdown is confirmed by now.

d) There is a definite space for policy rate action.

Pami Dua
a) Industrial growth is also expected to decline, while agricultural growth is expected to edge up – as rabi sowing has been higher than the previous year.

b) Flow of credit to the commercial sector, that remained tepid till the MPC met last in December, picked up in the last two months. This should nurture growth impulses. The increase in the monetary transmission of the cumulative reduction in the policy repo rate by 135 basis points from February to October 2019 should also help in reviving economic activity.

c) At the same time, while growth is slowing, headline inflation has increased beyond the upper tolerance band and is expected to remain at elevated levels (5% or above) through Q2FY21.

Chetan Ghate
a) Real sales of 286 listed private manufacturing companies in the manufacturing sector in Q3FY20 continued to weaken. Capacity utilisation was lower at 69.1 per cent in Q2FY20, consistent with low fixed investment and a negative output gap.

b) On the positive side, broader economic activity is beginning to show preliminary signs of a turn-around. This is encouraging.