Bolstering growth amid risks

Background: Monetary Policy Committee (MPC), RBI, Monetary policy, Repo rate, Inflation, Gross Value Added (GVA), Seventh Pay Commission. 

  • The Monetary Policy Committee’s decision to cut the benchmark repurchase (repo) rate by 25 basis points held no surprise for markets.
  • Articulating the main concern that informed the newly constituted rate-setting panel’s rationale for reducing interest rates, RBI Governor and chairman of the MPC Urjit Patel said the global demand environment was clearly looking far bleaker than previously anticipated, with the forecast for world economic growth set to be downgraded further.
  • The focus therefore needs to remain on supporting the domestic economy through an accommodative monetary stance. That the MPC has opted to lay primacy on supporting growth while keeping its sights firmly trained on the RBI’s central remit to target a medium-term retail inflation objective of 4 percent (within a band of plus/minus 2 percent) bodes well.
  • Decision-making by committee is never easy, and given the short time the MPC had since its constitution last month, the lucidity of the policy statement shows its six members have hit the ground running.
  • Even as it expects an improvement in the outlook for food inflation on the back of increased sowing and supply management measures undertaken by the govt, the MPC has been cautious in flagging the risks to the trajectory for price gains.
  • In the panel’s opinion, the main factors that could play a contributory role in furthering a fresh cost spiral would be the higher house rent allowances mandated by the Seventh Pay Commission, the increase in minimum wages and the possible spillovers through minimum support prices.
  • Multiple factors augur well for the outlook for both the industrial and services sectors. But the worsening trade demand could offset the gross value added momentum, while retaining the RBI’s GVA growth forecast of 7.6 percent.

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