Progress is impossible without change; and those who cannot change their minds cannot change anything – George Bernard Shaw
The Monetary Policy Committee’s (MPC) stance has come a full circle since it declared “calibrated tightening” in its October 2018 policy and stated that interest rate cuts were ‘off the table’.
Since then, it reduced the key policy rates twice in three announcements.
This time, the repo rate was cut by 25 bps from 6.25% to 6.00% and consequently, the reverse repo rate stands adjusted to 5.75%.
So what made the RBI change its mind?
When the MPC recommended calibrated tightening, crude oil prices were peaking and the rupee was dropping sharply. At the same time GDP growth was riding high.
Things have changed considerably since then.
Here’s how the MPC sees the economy now…
GDP growth for FY19 is expected at ~7%, as domestic economic activity decelerated. The MPC attributed this to a slowdown in consumption, both public and private. However, the RBI projects that it will be 7.2% in FY20.
Exports growth remained weak in Jan and Feb 2019 and correspondingly, the trade deficit narrowed down to its lowest level in 17 months.
The MPC also noted that CPI inflation has finally moved up to 2.6% in February 2019 after four months of continuous decline. Its revised estimates for CPI have dipped to 2.4% in Q4FY19 after which it expects inflation to climb to 2.9-3% in H1FY20 and 3.5-3.8% in H2FY20.
The policy concluded, “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”
Translated into simple English, this means we need to lower interest rates to boost growth.
A situation of sluggish business activity coupled with low inflation is a textbook scenario for interest rate cuts.
However, the proof of the pudding is in the eating.
So, the great question that plagues the RBI, businesses and consumers is: How soon and by how much will policy rate cuts get translated into lower lending rates?