RBI MPC Minutes: Benign inflation amid global trade uncertainty demands growth-supportive policy

RBI MPC Minutes: Benchmark interest rate reduction will bolster private consumption and support a revival in private corporate investment, Reserve Bank Governor Sanjay Malhotra had opined while voting for a 25 basis points cut in repo rate along with other five members of the rate-setting panel earlier this month.

Governor Malhotra-headed Monetary Policy Committee (MPC) had reduced the short-term lending rate by 25 basis points to 6 per cent on April 9. A similar reduction was done in February.

"When consumer price inflation is decisively around its target rate of 4 per cent and growth is still moderate and recovering, monetary policy needs to nurture domestic demand impulses to further increase the growth momentum. This is specially so amidst an uncertain global environment, which has amplified downside risks to growth," said the minutes of the MPC meeting released by the RBI on Wednesday.

Malhotra had said it will bolster private consumption and support a revival in private corporate investment activity.

"Going forward too, considering the evolving growth-inflation trajectories, monetary policy needs to be accommodative," he said.

The MPC had kicked off the easing cycle with a quarter-point reduction in February, its first cut in nearly five years.

"When consumer price inflation is decisively around its target rate of 4.0% and growth is still moderate and recovering, monetary policy needs to nurture domestic demand impulses to further increase the growth momentum," RBI Governor Sanjay Malhotra wrote in the minutes.

India's retail inflation slipped to a more-than-five-year low of 3.34% in March as food prices continued to moderate. Above-average monsoon rains could bode well for food prices.

In April, the RBI lowered its GDP growth estimate for the current fiscal year to 6.5% from 6.7%.

U.S. tariff policy flip flops, which have roiled financial markets, are expected to hit global growth as well.

Members of India's rate-setting panel said there was no clear estimate of the impact the U.S.-China trade war might have on the domestic economy.

External member Saugata Bhattacharya said that if the trade tariff actions are not significantly diluted, global trade and growth will slow down materially, likely spilling over into India via external channels, and further decelerating India's growth.

Malhotra’s deputy M. Rajeshwar Rao said trade tensions will have wider economic ramifications. “With US being India’s largest export destination, it could weigh on trade, financial markets, and domestic economic activity through both direct and indirect channels,” Rao warned.

The external members of the panel, Nagesh Kumar and Ram Singh, batted for further easing to support growth in Asia’s third largest economy. While Kumar voted for a 25 basis point cut, he said a half point reduction would be more effective.

“With growth below potential and a benign inflation outlook, the MPC should support growth by cutting the repo rate,” added Singh.

While inflation eased to the lowest in nearly six years in March, it is India’s weak growth that is taking centerstage as tariffs cast a shadow on the global economy. The International Monetary Fund on Tuesday cut India’s growth forecast to 6.2% for the current fiscal year, much lower than the central bank’s estimate of 6.5%.