The 75bps rate cut was passed by 4:2 majority. Here is the gist of the member wise perspectives in the MPC meeting as captured in the minutes.
Chetan Ghate focuses on the big global shift
Dr. Ghate has admitted to the huge change in sentiments in the light of COVID-19 and the need to avoid risk of monetary divergence. With the US Fed pushing rates close to 0%, it was more a question of when rather than whether for the RBI. Inflation almost took a back seat as Dr. Ghate focused on the need to protect the economy from the downside risks to growth post the lockdown. Dr. Ghate pointed out that postponement of consumption decisions could be the factor necessitating an immediate rate cut. Dr. Ghate voted for 50 bps rate cut to minimize demand contraction.
Pami Dua highlights the key growth risks
Dr. Dua called for aggressive rate cuts due to economic activity virtually coming to a standstill. According to Dr. Dua, COVID-19 could create a combination of a sudden contraction in demand and major supply disruptions as the domestic and international supply chains get impacted. She also sounded a word of caution that the lockdown could lead to negative GDP growth in the March quarter and also in the June quarter. This warning becomes critical in the light of Moody’s and Goldman Sachs downgrading India’s FY21 GDP to below 2%. Pami Dua also voted for a 50 bps rate cut.
Ravindra Dholakia focused on the need for ample liquidity
Dr. Dholakia called for a larger perspective of liquidity as the combination of rate cuts and liquidity infusion through OMOs. He has pointed out that large scale infusion of liquidity was in sync with the global monetary policy stance and doing anything else would risk monetary divergence for the Indian economy. Dr. Dholakia also highlighted that with inflation low and transmission likely to be much smoother, the impact of rate cuts on loan growth and liquidity could be more seamless. Dholakia voted for a more aggressive 75 bps rate cut.
Janak Raj calls to neutralize rising bond yields
Janak Raj has discussed at length about the anomaly of yields in India. The bond yields have failed to keep pace with the repo rate cuts. That has led to rising bond yields in the midst of falling repo rates. That is largely because the government fiscal deficit has already overshot by 50 bps and it is anticipated that the pandemic could result in fiscal deficit going much above 4%. This has led to hardening of yields which is moving in the opposite direction to repo rates. The impact is evident from the latest 10-year government bond issue which happened at 6.53%; more than 200 bps above the repo rate. According to Raj, an aggressive rate cut was essential to neutralize the yield hardening. Janak Raj also voted for 75 bps cut.
Michael Patra calls for Avant Garde monetary policy
Dr. Patra is all in favour of a drastic approach going beyond the cautious monetary approach. According to Dr. Patra, the scale and magnitude of COVID-19 calls for the use of fiscal and monetary instruments at the command of the RBI and the government. Dr. Patra emphasized that rate decision must be substantive enough to percolate down to the most micro level in a short span of time. Dr. Patra also voted for a 75 bps rate cut.
Summing up views of RBI Governor
The RBI governor has expressed hope that weak oil prices and controlled food prices will give an inflation justification for a rate cut. However, Das has rejected the notion that the monetary space was limited due to repo rates being at all lows. According to Das, despite the current repo levels, the disinflation risk due to COVID-19 had opened the doors wide for further rate cuts. He also pledged that the central bank would keep the stance accommodative and rates low as long as the need to revive growth remained.
It is hardly surprising that the MPC minutes have been largely dominated by COVID-19. The first priority for the RBI, clearly, is to manage a smooth restart to the economy post lockdown.