RBI Monetary Policy Committee Members See Space For More Easing

The impact of the pandemic on economy has been far more acute than expected and the central bank’s monetary policy committee (MPC) stands ready to ease financial conditions further if warranted, minutes of its May meeting showed.

The Reserve Bank of India cut interest rates by 40 basis points last month after an emergency meeting, taking the key repo rate to 4 per cent, its lowest level on record.

“Given the severity and depth of the crisis, the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated,” MPC member Pami Dua wrote in the minutes released on Friday.

Though the MPC refrained from providing any forecast on GDP growth, members said they expect the economy to contract in the current fiscal year and noted that agriculture and allied acitivities has provided the only silver lining.

“My view is that the damage is so deep and extensive that India’s potential output has been pushed down, and it will take years to repair,” deputy governor and member Michael Patra wrote.

Members said the monetary and fiscal measures taken so far were aimed at cushioning the fall in aggregate demand in the economy but were hopeful that they would not have a large inflationary impact and would leave scope for further rate cuts.

Governor Shaktikanta Das said it was important to take into account the weak growth momentum and the need for prioritising growth in view of the less risky inflation outlook, while also ensuring that financial conditions remain benign when a recovery takes place, so that the confidence is sustained.

“Rate cuts, assuming that there is transmission and (that) banks lend, work most effectively when the economy is on the upside. The MPC should keep some gunpowder dry,” member Chetan Ghate wrote.

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