By Swati Bhat and Siddhi Nayak
MUMBAI (Reuters) – A big rate cut would assure stakeholders of India’s focus on economic growth and aid in faster transmission while boosting investment and consumption, members of the monetary policy committee wrote in the June policy minutes published on Friday.
Two weeks ago, the Reserve Bank of India cut its key repo rate by a larger-than-expected 50 basis points and slashed the reserve ratio for banks. It also changed its monetary policy stance to “neutral” from “accommodative”, stating that room for further cuts was limited.
“It is expected that the front-loaded rate action, along with certainty on the liquidity front, would send a clear signal to the economic agents, thereby supporting consumption and investment through lower cost of borrowing,” RBI Governor Sanjay Malhotra wrote.
All six members of the committee concurred that the fall in inflation in recent months had opened up policy space to support growth. However, only one of them – external member Saugata Bhattacharya – argued for pacing the rate cuts.
“Continuing elevated uncertainty remains, to my mind, the primary reason to exercise caution in pacing monetary policy easing,” wrote Bhattacharya, who voted for a 25-bp reduction.
The RBI’s assurance of continuing large durable liquidity support is likely to have a more dominant effect on further monetary transmission compared to a deep cut in the repo rate, he added.
Retail inflation fell to 2.82% in May, the lowest in more than six years, staying below the central bank’s 4% target for the fourth straight month as food prices eased. It is expected to largely remain subdued during the year.
“..as monetary policy works with a lag, under the current circumstances, a 50-bp cut is preferable to two 25-bp cuts for faster and greater transmission,” executive director and MPC member Rajiv Ranjan wrote in his minutes.
Despite being one of the fastest-growing large economies, India can grow faster based on favourable demographics, conducive shift in regulatory policies, significant infrastructure enhancement, and leveraging on the macroeconomic stability achieved during the past decade, said RBI Deputy Governor Poonam Gupta, who was part of the MPC for the first time.
(Reporting by Swati Bhat; Editing by Janane Venkatraman)
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