Why in news?
- The fifth meeting of the Monetary Policy Committee (MPC) held on June 6 and 7.
- For the first time, it broke with unanimity and also went against widespread industry aspirations of a policy repo rate cut.
What is the background of the issue?
- The unanimous approach towards the rate cuts has been replaced by an exchange, if not a clash of contrary views.
- The concern is of members now doing their own leap, coming as they do from different backgrounds, so that divergent.
- The members placed on record that the readings on “a clear declining trend” in inflation.
- Contrary to that of the RBI, as actual inflation had turned out to be lower than the latter’s projections.
- There is a wait and watch scenario in the decisions made.
What are the concern with the decisions taken?
- The question on how the meeting is likely to influence market perspectives, particularly since there isn’t any clear forward guidance provided as a holistic view of the Committee as a whole.
- There remains a larger risk of a policy decision arising out of a melange of views that prosecute individually held or ideologically driven opinion.
- The “output gap”, which is the actual output minus potential output, and is an important measure to help a central bank assess short-run inflationary pressures.
- A negative gap calls for an expansionary monetary policy, which in this case means a policy repo rate cut.
- An output gap calculated on data for 2016-17 that profile a slowdown will, by definition, be negative and wider than otherwise.
- For an economy that is projected to grow at 7.3 per cent in 2017-18, however, it must be the case that the output gap would narrow and close.
- These are very divergent views, and they might indicate a reiteration of held positions, rather than a discussion in which the two convince each other.
What is the way forward?
- The quiescent investment cycle remains a key macroeconomic concern and there are most critical aspects of the monetary policy.
- Even if a rate cut is offered, a likely scenario is that banks will not reduce the lending rate, or make very minor changes and will take up the “wait and watch” approach.
- But they will be tempted to cut the deposit rate further, this brings some unintended and undesirable results for a policy that is meant to boost the dormant investment cycle.
- The members are in hurry for a policy repo rate reduction, mirroring what possibly is a view that is usually said to be held by the government wanting a booster for the economy.
- Hence there is a good clash of ideas building up, bringing a new kind of dynamic to the RBI.
Source: Business Line
