MUMBAI: Members of theReserve Bank of India’s(RBI’s) monetary policy committee (MPC) debated at length on whether monetary easing alone is sufficient to revive the ailing economy, with gross domestic product (GDP) growth expected to slip below 6% in FY 20, minutes of the MPC meeting on 5 October released on Friday showed.
While all the members broadly acknowledged the need for urgent intervention to revive growth, a section felt that monetary policy alone could not be the answer to the slowing economy — instead , further fiscal measures by the government were warranted to deliver the desired results.
Since MPC’s last meeting in August, global economic activity has weakened further. Heightened uncertainty emanating from trade wars and geopolitical tensions continues to cloud the sentiments, leaving global financial markets unsettled.
On the domestic front, GDP growth slumped to 5% in Q1 FY 20, extending the sequential deceleration to the fifth consecutive quarter.
RBI governorShaktikanta Dasemphasized the need for fiscal prudence by the government amid concerns of widening deficit. All-out efforts are required to strengthen private consumption and investment, he said.
“There is also a need to be watchful of the fiscal situation; however, the government has indicated that it would maintain the fiscal deficit. As the inflation scenario remains benign with headline inflation projected at below target there is policy space to address growth concerns, “said Das.
Michael Patra, executive director in charge of monetary policy, added: “In the June meeting of the MPC, I had emphasized that while monetary policy is taking the lead as the first line of defense, a full throttle effort by all arms of macroeconomic management is the need of the hour. monetary and fiscal actions have been undertaken, and it is important to buttress this coordinated endeavor. “
Chetan Ghate, an external member of MPC, too, felt that monetary policy cannot be a “Permanent form of stimulus”. In order to make his point, Ghate cited Lawrence Lindsey’s book, The Growth Experiment Revisited, which says: “Monetary policy should lean against the wind and help stabilize the business cycle. But it cannot become the wind itself , particularly one that blows at gale force. ” Ghate, however, said that he remained data-dependent and further policy action will depend on the growth-inflation dynamics.
Pami Dua, another external member of MPC, felt that RBI should wait and watch to see the combined impact of the government recent measures and pending monetary policy transmissions by banks on the economy.
Ravindra Dholakia, the most dovish member of the committee, felt that further monetary policy action remains an imperative.
“While such reforms are urgently required, they should not constrain the rate action by RBI. In my opinion, enough space exists as argued above for a 40 bps reduction in the policy repo rate now, with space still existing for future till growth recovers, “he said.
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