RBI needs to support growth aggressively
The RBI has hit a hat-trick this calendar year with three consecutive rate cuts, bringing down the policy rate at which it lends to banks to 5.75 per cent. Since the February monetary policy committee meeting and the first rate cut, the central bank has been consistently raising issues of slowing economic growth, and its tilt towards supporting growth has got stronger in the current round.
The RBI’s mandate is towards price stability, but it cannot ignore growth. The unanimous decision to cut the policy rate and the change of policy stance from “neutral” to “accommodative” is positive, given that the signs all around are pessimistic.
The current rate cut has come when the GDP rate has been revised downwards to seven per cent, and inflation is projected to stay well within the RBI target of four per cent. But the question is: Has the central bank done enough, and well in time? One can argue that it is at perhaps an extremely crucial juncture like this when the slowdown has gone to worrying levels that the Monetary Policy Committee has passed a rate cut unanimously, and moved to an accommodative stance.
Could it have made a higher rate cut earlier? Or even in the current policy when there is still headroom to do so given the fact that real interest rates are high? Many in the industry and academia have in fact argued for a higher rate cut to support growth. In fact one of the most dovish members of the MPC in the last meeting had said he preferred a higher rate cut, and it was the right time to act decisively. The RBI has been consistently pushing the banks to pass on the rate cuts without which the policy action is useless. Transmission is also dependent on liquidity in the system.
Banks have been hiking deposit rates at a time when the RBI was cutting repo, increasing their cost of funds. This kind of scenario can be avoided only if the transmission is assisted with comfortable liquidity. If the RBI doesn’t get aggressive to support growth now, it will be falling behind the curve.