NEW DELHI: The members of the Monetary Policy Committee (MPC) took solace in the fact that inflation pressures are waning and domestic demand remains robust, revealing the minutes of the MPC meeting held from 4th to 6th October. The MPC decided to keep the repo rate unchanged at 6.5% even though its policy statement reeks of hawkishness.
Many members of the committee cited the drop in net financial savings as an indicator of strong demand, and therefore, were not too concerned on the growth front. The net financial savings in FY23 dropped to 5.1% compared to 7% in pre-pandemic levels. While many raised concerns over the drop in net financial savings, MPC members see it as a positive sign.
According to Dr Ashima Goyal, it was household financial liabilities that increased from 3.8% of GDP in 2021-22 to 5.8% of GDP in 2022- 23, resulting in a 2.1% fall in net financial savings. “The rise in financial liabilities implies a rise in household physical investment and shows the interest sensitivity of demand in India, with a youthful population borrowing to acquire assets,” noted Goyal.
“This willingness to consume at the cost of reducing savings is very important because it is household consumption that has been propping up the economy in the face of headwinds from fiscal consolidation, weak external demand and tepid capital investment,” noted Prof Jayanth R. Varma.
Goyal, though, cautioned against sudden rise in household debt, even if it is low by international standards. “It is best to restrain over-enthusiasm in good times and thus avoid a crash. Prudential tightening, such as raising LTV ratios or risk weights, would be preferable to raising policy rates more,” she said.
Most members were of the view that given the likely global slowdown, and normal monsoon price pressures are moderate. However, they were mindful of the global fuel and energy prices volatility and firming up of some food commodity prices.
“Inflation prints for September and October will need to be monitored carefully to look out for the moderation that our projections anticipate. If we tame inflation durably, we will prepare the ground for a long innings of strong and stable growth,” says deputy RBI governor Michael Debabrata Patra.